Insurance Industry

Lower Investment Income Impacting Carrier Appetite

Insurers emphasizing risk engineering to cope with reduced investment income.
By: | October 20, 2015 • 4 min read

The impact of investment income on carrier financial performance is changing the insurance industry and the availability of coverage, according to a presentation at the Brokerslink annual conference held in New York on Oct. 16.

Robert S. Schimek, president and chief executive officer of the Americas for AIG, said there is a bifurcation among carriers as a result of the continuing low interest rates prevailing in many industrialized countries.

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There are only two sources of income for insurers: underwriting profit and investment, Schimek said.

“Investment income depends upon the yield curve. When it is low, as it is now, then getting the underwriting part correct is all the more important.”

Schimek said that insurance companies view coverage differently when interest rates are low.

“Returns on excess workers’ comp are the worst because they stretch over 16 years. So our appetite for that type of coverage is less today than it was when interest rates were higher.” — Robert S. Schimek, president and CEO of the Americas, AIG

“Returns on excess workers’ comp are the worst because they stretch over 16 years. So our appetite for that type of coverage is less today than it was when interest rates were higher,” he said.

Robert S. Schimek, president and chief executive officer of the Americas, AIG

Robert S. Schimek, president and chief executive officer of the Americas, AIG

Expanding on that theme, Schimek said that “people ask me, ‘What happened to the old AIG?’ They say, ‘Give me that swagger and take that risk.’ I reply that you give me investment income and I will take that risk. But we cannot do it at current interest returns.”

Careful to draw a distinction but not make a value judgment, Schimek said that as a result of the underwriting-investment situation of the last few years, insurance companies have tended to reconfigure themselves into two different types.

“The environment in our industry is changing because of the macroeconomic factors,” he said.

One carrier type is capital heavy, and focused on policies. They are typically non-primary insurers, but high risk takers, and very efficient, he said.

“Today, there are 10 to 20 billion things connected to the Internet,” he said. “By 2020, there will be 40 to 50 billion things in the Internet of Things. That is changing the landscape of risk.” — Robert S. Schimek, president and CEO of the Americas, AIG

The other type, that includes AIG, according to Schimek, is focused on loss control, claims handling and science. They tend to be primary insurers, with the focus on underwriting and science; less efficient in a pure profitability sense.

The global environment is also impacting insurers, he said.

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The yield curves vary not just in time and with type of coverage, but in different economies. One useful normalized comparison is combined ratio, he said, noting that a combined ratio of 100 in the U.S. is equivalent to 94 in Japan, a country with low inflation, and 111 in Argentina, a country with high inflation.

He also noted that the 100 in the U.S. was comparable to just 80 in Greece, which he suggested should decouple its currency from the euro — although that now seems less likely than it did earlier in the year.

“In the U.S., AIG now has more engineers than underwriters,” said Schimek.

He noted that the day before the conference, AIG appointed Madhu Tadikonda, who had been commercial chief science officer, as commercial chief underwriting officer.

Tadikonda now oversees chief underwriting officers in the commercial insurance group’s global lines. He will define global underwriting standards. Drawing on his science background, he will also oversee development and deployment of underwriting tools to make use of the company’s considerable data set and capabilities, Schimek said.

“The focus is on differentiation, our ability to control and reduce risk. The battleground used to be premium — who can charge the lowest. We are now moving on to total cost of risk so the competition is no longer commoditized in a battle for premium.”

AIG chooses to be among those differentiating themselves on risk management, he said, because risk is changing so quickly, citing the examples of drones, railroads and driverless cars.

“Today, there are 10 to 20 billion things connected to the Internet,” he said. “By 2020, there will be 40 to 50 billion things in the Internet of Things. That is changing the landscape of risk.

“There are 40,000 drones flying today, and by 2025, there are expected to be 160,000. That will create huge new risks, but could also help manage risk. What if we could have flown drones over the area hit by Hurricane Katrina immediately after the storm, and made adjustment decisions, literally on the fly?”

As for driverless cars, he suggested that their appearance on the roadways are expected to reduce the many accidents caused by driver error.

“There will still be accidents, but the responsibility will be not on the occupants, but on the corporation that built or directed the car. That is how the nature of risk changes,” he said.

What if we could have flown drones over the area hit by Hurricane Katrina immediately after the storm, and made adjustment decisions, literally on the fly?” — Robert S. Schimek, president and CEO of the Americas, AIG

But risks remain among older industries as well. While dispatching systems for railroads are high tech, the sector remains an elemental heavy industry, relying on steel wheels on steel rails.

And there have been several high-profile accidents involving trains carrying crude oil.

“Our rails are not the most modern things you have ever seen,” he said.

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So far all of the railroad accidents in the U.S. involving crude oil have occurred in areas with low or no population, unlike the tragedy in Lac-Megantic, Quebec, in July 2013, where a runaway crude train incinerated the center of that small town, killing 47 people.

New techniques in oil and gas production have enabled the U.S. to reclaim a top spot as a global producer, but if there is an accident in or near a major city, Schimek said flatly, “that will require an insurance response.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [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]