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October 17th - 19th,
1999
"Insurers Can Improve Stock Price With
"Someone has got to finally put the breaks on and walk away from business," said Hugo J. Warns III. Workers' compensation is one line that is particularly guilty of underpricing. In California, workers' comp has a combined ratio of 140 so far this year and may reach as high as 160 by year end, Warns said. Warns spoke Tuesday at the A.M. Best Co.'s Insurance Information and Technology conference in Baltimore. Insurance stocks have taken a beating this year, with the stock prices of property//casualty insurers down 31.6% and life companies down 28.1% to date. That compares with the Dow Jones Industrial Average being up 9.7% and the Standard & Poor's 500 stock index rising 1.6%. Warns said that besides inadequate pricing, investors have a litany of concerns. "There's a very negative aura around investing in the insurance industry right now." He cited the following investor concerns: - Catastrophe losses. Activity is high, with $100 billion paid on catastrophe claims in the past 10 years, more than double the cat losses of the previous 40 years. - New technology. He noted the banking industry spends about 8% of its revenues on technology, while the insurance industry only spends 3.2%. Warns also said insurers should be looking to replace 30-year-old legacy processing systems and adopt an "investment instead of maintenance" attitude. Warns also lauded American International Group Inc.--a stalwart opponent of underpricing--for introducing AIGdirect.com and establishing a Web presence. - Excess surplus. The insurance industry's surplus is 2.5 times its net premiums written. Warns said he'd like to see insurers return some of that excess surplus by repurchasing stock or increasing dividends. - Distribution. Companies must develop multichannel distribution; those relying on one channel won't survive, Warns said. He added companies must get beyond the fear of disenfranchising agents and brokers to sell insurance directly. "If you don't cannibalize your own people, someone else will," he said. Warns said successful companies in the future will either have
a niche focus or have a dominant market share; a broad, competitively priced
product line; ability to generate underwriting profits; strong loss reserving
habits; multiline distribution channels, and above-averaging retention rates.
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The best thing that insurers can do to
improve their stock price is to stop underpricing their policies, said an equity
analyst with Legg Mason.