Insurance Financials

Strong Headwinds

Recent results for insurers have been good but substantial headwinds are in the offing.
By: | May 6, 2015 • 5 min read

In its recent 2014 fourth quarter P&C Insurance review, Morgan Stanley Research reports strong results capping off a solid 2014, with benign CAT losses and strong earnings per share continuing a trend of upbeat earnings that spans eight consecutive quarters. But analysts also sees a variety of factors, including flat returns on investment and pricing approaching negative rates, that could pinch insurers in 2015.


“We cited four fundamental headwinds,” said Morgan Stanley Property & Casualty Insurance analyst Kai Pan, one of the report’s authors. The most notable is downward pressure on pricing, due in part to excess capital.

After three years of steady improvement, prices flattened in 2014. Increases in mergers and acquisitions seen in 2014 are expected to continue and even to accelerate, helping to deploy some of this excess capital, but not enough to bolster pricing.

“Pricing will continue to decelerate and could turn into negative territory for the commercial line pricing this year,” said Pan.

If this downward pressure pushes prices below the loss cost trend, or inflation, underwriting margins could deteriorate, creating a second significant headwind. Over the last three years, prices have increased at four to five percent, significantly above the loss cost trend, contributing to an expansion of margin.

Pan cautions that, “Going forward…if pricing is going to be flat or negative, and the loss cost or inflation trend is still positive, there will be a negative spread between the top line premiums and expenses, the claims. Therefore, there could be some underwriting margin compression or contraction going forward.”

Among the primary factors contributing to the industry’s positive performance in 2014 was earnings from the release of prior year reserves made possible by relatively benign CAT activity, but there is no reason to believe that will persist.

“Over the past five years, the companies we cover, the underwriters, about 30 percent of their earnings have been coming from prior year reserve releases,” said Pan.

“If the earnings from prior year reserve releases is going to be slowing down, that is another headwind.”

Pan also cites relatively low earnings from the investment side, something those prior year reserve releases have helped to offset. Industry data shows that 60 to 80 percent of industry earnings comes from investments, and an average of 60 percent of industry investment portfolios are composed of fixed income instruments like bonds.

“The yield on these fixed income instruments has been under pressure for many years,” said Pan. “The 10-year U.S. treasury yield is around two percent.”


Pan points out that even if bond yields improve, investment earnings may continue to suffer. Unless yields increase by 100 basis points or more — something few forecasters expect — as older, higher-yield bonds mature, they will be replaced with new lower-yield bonds.

Robert Hartwig, President of the Insurance Information Institute, acknowledges these possible headwinds, but is still upbeat.

“No one should construe anything in this report as meaning that the insurance industry is anything other than rock solid financially,” said Hartwig.

Robert Hartwig President Insurance Information Institute

Robert Hartwig
Insurance Information Institute

While he concedes that all of these headwinds “exist to varying extents for different insurers,” he sees them mitigated by a variety of factors.

The trend toward consolidation could help expand margins. Modest inflation and a benign tort environment also help brighten the outlook.

The Federal Reserve’s anticipated interest rate increases will help boost investment earnings. Some of the cited headwinds could actually mitigate each other. Higher CAT activity and a decline in reserve releases, if they occur, would both ease downward pressures on price.

Most encouraging is the overall economic trend, and the industry’s recent track record of outpacing it, Hartwig said.

“We would expect overall premium values to grow somewhere around the 4 percent range and that is substantially better than the overall economic growth, which is 2.5 to 3 percent. So that means the P&C Insurance industry is benefiting from the tailwind of economic growth,” said Hartwig.

“I would certainly expect to exceed economic growth by a point or a point and a half in 2015.”

Pan sees earning requirements as creating a floor on negative pricing, but insurers may find themselves increasingly squeezed between competitive and other downward pressures on price, and a need to maintain a level of underwriting income that can offset weak investment yields.

While navigating that narrowing range may be a challenge, Pan does not see a situation where policies are left unwritten.

“Every company models risk differently,” he said, “so they might have a different pricing strategy and will make different pricing decisions.”

Buyers may see prices decrease, but they may also find themselves having to search a little harder to find insurers willing to write the policies they seek at the price they want.

Hartwig said he has faith insurers will govern themselves effectively.

“You’re not seeing undisciplined pricing in the market today,” he said.

“You’re seeing a very competitive market… There may be some margin compression but you’re not seeing irrational pricing in the marketplace.”

Pan and Hartwig both see insurers benefiting from new tools to help them make pricing decisions.


“There’s no question that insurers have better management information systems in place that allow them …to make sure that any adjustments that need to be made can be made more quickly than in the past,” said Hartwig, something that will help diminish recognition lags as well as the amplitude of the industry’s inevitable cycles.

“Advances in technology in terms of data and analytics, will help [insurers] make more informed underwriting decisions, to maintain a desirable underwriting margin,” said Pan.

“But you will find some players probably underpriced.”

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.


In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.


Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”


How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.


One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]