Insurance Industry

Challenges Ahead for Insurers and Brokers

Fitch Ratings expects deteriorating earnings for insurers and only modest improvements for brokers.
By: | December 16, 2015 • 3 min read

Fitch Ratings expects a challenging year for U.S. property/casualty insurers in 2016, but anticipates that ratings will remain stable.

The majority of ratings in the sector is not expected to change in the next 12 to 18 months, according to Fitch’s “2016 U.S. Property/Casualty Insurance Outlook Report.”

Near-term earnings deterioration is anticipated, but a shift toward sharply inadequate premium rates or profit levels approaching operating losses is unlikely, the report stated.

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year.” — James B. Auden, managing director, Fitch Ratings

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year,” said James B. Auden, managing director, Fitch Ratings. “However, statutory capital adequacy will remain strong.”

“The U.S. property/casualty insurance industry faces underwriting challenges, particularly in the commercial lines segment, as a softening premium environment will promote future deterioration in underwriting results,” he said.

“Performance for the P&C universe as a whole is anticipated to deteriorate in 2016 toward a break-even underwriting result.

“P&C underwriters face greater difficulties in generating adequate returns on capital beyond underwriting and pricing,” Auden said.

“The investment contribution to earnings continues to decline as falling portfolio yields reduce investment income, and investment gains reported in the last three years are less likely to continue given economic growth prospects and current equity valuations.”

Factors that promote future movement toward a negative industry outlook include large events that significantly affect the industry’s capital position such as a large natural catastrophe, discovery of adverse claims experience, reserve deficiencies or a large market downturn, Auden said.

“Shifts in underwriting trends resulting in prolonged underwriting losses for insurers could also lead to consideration of negative sector outlooks,” he said.

Outlook for Brokers

As for U.S. insurance brokers, revenues and earnings are likely to improve only modestly in 2016, according to Fitch.

Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

“Continued flat or declining premium rate changes in commercial insurance segments and a soft reinsurance market will pressure brokers’ 2016 organic growth,” said  Gretchen K. Roetzer, an analyst and director in Fitch’s insurance group.

“However, global brokers’ revenues from diverse product and geographic platforms, including health care and benefits, should help offset these headwinds.

“Strong retention and insured exposure growth from a slowly improving economic environment will also promote revenue expansion,” added Roetzer, who has analytical coverage responsibilities for property/casualty reinsurance companies and insurance brokers.

Fitch’s “2016 U.S. Insurance Broker Outlook” report said that near-term operating performance and balance sheet strength support a stable credit ratings outlook for the brokers it covers.

Profit margins are projected to remain stable with modest improvement due to reduced expenses, said Roetzer. “On average, profit margins were relatively flat in 2015 with two of the five publicly traded peers in Fitch’s peer group reporting reduced margins in part from one-time items,” she said.

“Private equity firm interest in brokers remains strong, though banking institution interest in insurance broker diversification has waned,” said Roetzer.

“We expect brokers to continue supplementing organic revenue growth with selective acquisitions.”

Roetzer said that lower rates on commission-based business would affect profit margins and organic growth.

“We expect brokers to continue supplementing organic revenue growth with selective acquisitions.” — Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

“This would impact certain brokers more than others based on the mix of business, commission versus fee-based, and depending on the broker’s geographic diversity,” she said.

“A poor economy can affect clients’ willingness and ability to spend resources to outsource or conduct projects, or hire new employees,” she added. “Interest rates may also be pressured and cause lower than normal rates. All of these factors can affect brokers’ revenues and growth.”

Financial leverage increased for several organizations, including the Big Three brokers (Aon, Marsh and Willis) while interest coverage remains favorable and supportive of current ratings levels, the report noted.

There was some uncertainty about Willis Group Holdings, due to its proposed merger with Towers Watson.  Fitch noted that the merger’s closing still needs approval by Towers Watson’s shareholders.

Fitch expects debt to EBITDA for most of the peer group to improve moderately in 2016 if debt levels remain stable or even decrease modestly with various debt maturing, and if EBITDA grows as anticipated.

The firm anticipates few rating changes over the next 12 to 18 months, despite expecting improvement in some credit fundamentals in 2016.

Steve Yahn was a freelance writer based in New York. He had more than 40 years of financial reporting and editing experience. Comments can be directed to [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]