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SMA's Insurance Transformation, Where Strategy Meets Action


Insurance: Weathering The Storm

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Please join us for this brief podcast on the steps insurance carriers can take to weather the current economic crisis.

Listen to or download the 7:25 minute podcast below:

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PS: Hello, this is ebizQ's Peter Schooff. And today I am speaking with Deb Smallwood, the Founder of SMA, Inc., which is a strategic advisory firm that services the insurance industry. Deb is also the ebizQ Community Manager for Insurance. And today, we're going to discuss a topic on the top of every one's mind, how to weather the current storm in the insurance industry. So thank you very much for joining me today, Deb.

DS: Oh, hello. How are you today?

PS: Good. Now, so first of all, how is all this bad news about the economy and the stock market affecting the insurance industry?

DS: Well, you know, that's a great questions and I think a lot of us are wondering the direct impact and indirect impact it will have on carriers. First of all, the insurance industry has weathered storms like this in the past. They've weathered the great depression, they weathered wars and terrorist attacks and so what we're finding is that they will weather this storm as well.

But what's really interesting is that as we start to see the AM Best Data projecting in the annual reports coming out, there were significant losses or the profit statements weren't as large as previous years, but they're holding strong and they're staying the course. But if we specifically look at some of the indirect impact its having on their book of business, what I'd like to do is step through a couple of the economic concerns and the relationships it's having on the insurers.

The first one is the subprime melt downing and credit crunch. And as we all know, AIG has fallen to that whole meltdown area and there are a couple of other large carriers that had some of their own investment wrapped up in that subprime category. But indirectly, some of the insurers actually insured some of this so they're starting to see some tremendous losses in this area. Some of the directors and operator in E&O exposure for some insurers, the claims are going up, and the bond insurers are actually having some problems this.
So it's indirectly impacting their book of business. The housing slump and the whole real estate market crash is really impacting them from a reduced exposure growth so you can even think if people aren't buying new homes, then they're not getting new house insurance. The lower interest rates and the stock market slump, insurance companies make significant revenue from their investments between their loss reserves and the amount of cash that they bring in from their book of business, they actually make significant dollars on their investments.

So with lower interest rates and the stock market slump, obviously, they're not making any income investments that they've had. And then just last, the general economic slowdown and the recession, we're seeing clearly an impact on the commercial lines exposure business. So for example, workers' comp insurance is based on payroll. So if companies are laying off employees, that's going to have a direct impact on the revenue as, it relates to work comp.

And on the flip side, what we sometimes see in economic downturn is that more people will file claims so losses may go up and it won't be offset by any type of growth on the revenue side. So that's just a quick summary of the risk and the implications to insurance companies.

PS: Well, and I think you've covered this a little bit but how exactly then are insurers responding?

DS: Well, they're staying the course. There is a renewed focus on operational efficiency. The one thing that they can control are their expenses so they're looking for ways to drive operational efficiency and cut their expenses, and they continue to stay the course in terms of profitable growth. It's very difficult in these times to have profit let alone growth, but they are staying the course.

A couple of things that they're doing, they are looking at streamlining their business operations from claims, billing, finance, and even the front end processing. They're looking at ways that they can reduce their overpayments and claims, and especially in this time starting to emphasize on maybe more fraud and more diligence upfront with the first notice of loss reporting. They're looking at leveraging data and business intelligence to improve their overall pricing and target more profitable business.

And even in this economic downturn, there are some industries that have high growth or some growth. They're looking for those new markets, always looking to retain and attract new agents and new customers. So in the land of (Inaudible) most of it is actually mandatory, right. So everyone needs to have automobile insurance, and homeowners, and businesses need to have work comp. So even though the whole industry is not growing, you can still steal from your competitors. So they're looking at ways to do that. And overall, just trying to find ways to be more agile and respond to change in the marketplace.

PS: Right. That makes sense. Now, if you had to drill down, what top priorities should the insurance industry be focusing on now?

DS: Well, there's five areas of focus and in really trying to achieve that desired capability, the whole frontend of the business both in the PNC and the life and annuity around sales and channel management so looking at ways to reduce overall service and cost, looking at ways to provide seamless experience for the customers and the agent, looking to reduce complexity and redundancy.

And the whole area of underwriting, looking to become, obviously, more efficient and more effective but really aligning brisk appetite to their pricing and looking at ways to create straight through processing. On the policy management side, it's really, again, creating efficiencies and reducing expenses, looking at ways to do more with less paper and to continue to stay compliant.

On the whole claims management, I mentioned more focus on fraud, auto adjudication meaning not having adjusters involved and having automatic claims processing, really driving quality information and make better claims decision. And last, is the whole area of customer relationships, and customer intimacy, and improving the customer. And for a lot of carriers, the customer sometimes is either the agent or the policyholder so really trying to create that one company, that one voice, and impersonalize, and have high touch where appropriate.

PS: Interesting. Now, what advice do you have for carriers?

DS: To continue to stay the course. We're spending a lot time of times with carriers relooking strategies and looking at their strategies to their business plans. So staying the course, being really clear about what their overall strategies are, where they want to be at the end of 2009, and really being diligent and very focused on their IT investments, making sure that when they make those investments, they align to strategy in their business needs.

PS: Well, that's good to know. Thank you very much for joining me today, Deb. And I recommend every one listening to this to please check out her incisive coverage of the insurance industry on ebizQ. Thanks Deb.

DS: You're welcome.

Announcer: This has been an ebizQ podcast.

The purpose of the SMA blog is create a dialogue around insurance transformation; launching a different perspective on linkage between strategy, process and technology choices and shifting the mindset from a technology driven approach with SOA & BPM to a business driven service-oriented thinking that creates agile and flexible new insurance business models. Look for a wide gambit of trends, research, case studies, and insights on making transformation a reality.

Deb Smallwood

"I grew up in the insurance industry and have experienced the shackles that ineffective business processes with misaligned monolithic technology solutions have placed on insurance companies...

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Karen Furtado

Karen Furtado brings a wealth of industry knowledge to SMA. She spent 25 years at CGI, focused in insurance. Her specific areas of expertise include product development, complex system implementations, vendor selection processes, project management and business and IT outsourcing services. Her passion is working with both technology providers and carriers to deliver high-value solutions for core issues facing the industry. Karen actively participates as an industry speaker.


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