Chapter President, Pete Palestina, introduced the featured speakers. They were (In order of presentation): John W. Smithson, Chairman & CEO, PMA Insurance; Robert C. Olsman, President & CEO, Reliance Insurance Company; Seth D. Freudberg, President & CEO, United National Insurance; and Howard C. Stevens, President, Penn Mutual Insurance.

Smithson (PMA):

Smithson began his remarks with a brief an overview of his company, noting that it is engaged in nearly all lines of business, including regional p & c commercial insurance, reinsurance (in top 20) and excess & surplus.  Then he discussed his views of the following major trends:

Consolidation within insurance industry – This is occurring in all areas but especially in re-insurance; agents & brokers segments have already consolidated.

Consolidation in banking & insurance services – Federal legislation (HR 10, etc.) known as "financial services modernization" is being considered by Congress and will probably be enacted into law within the next year. The intent is to eliminate many of the regulatory barriers among between banks, securities firms and insurance. In the immediate future, he doubts that any banks will buy insurance companies but that trend will continue once legislation is passed.

Convergence – This refers to new financial products being applied along with traditional risk transfer mechanisms as additional tools in the risk management process. Examples: securitized products, "Act of God" lines, swaps & options

Pricing and other survival issues - It will be difficult for the marketplace to generate higher pricing than currently exists until capital levels drop significantly. Many people have been trying to identify a single event that would change the dynamics of this issue, but in his view, none is sufficient alone to bring about a change. He emphasized this statistic: Publicly traded insurance companies had a market capitalization of approximately $ 500 billion 18 months ago; since then this value has declined by $115 billion. In other words, investor value in insurance stocks has dropped $115 billion. (Hurricane Andrew cost was "only" $ 25 billion.) This has put pressure on those publicly traded companies for Merger & Acquisition activity.  The tough question to answer is what effect this trend will have on insurance company pricing policy? Sooner or later, he concluded, investors and insurance company management would to have to deal with the weak returns being generated and falling capitalization levels that currently exist.

Olsman (Reliance):

Recalling his appearance several years ago for the Chapter on this same topic, Olsman said that he had focused on the need for behavioral change, at the transaction level between underwriters and producers. In contrast, today he would describe his comments as "A View from the Swamp." He discussed the challenges confronting the industry :

Revenue inadequacy - Despite the healthiest economy that our nation has enjoyed in a century, the P&C insurance industry is growing at just a 1-2 % rate, with commercial lines flat or even down 1-2 %. Underwriting cash flow has been negative for years, and continues so. This means that the income we take in is not enough to cover operating expenses, commissions and paid losses. This problem will become worse over the next few years, he predicted.

Consolidation – He expects this trend to continue at agency, brokerage and company levels. The real issue, however, is whether this is creating better enterprises? Meaning: more efficient, more effective, and able to grow earnings?

Technology/ Information Systems - It has given us more processing effectiveness, quicker real time information on which to base decisions. He noted that all management information is "backed up online" at his company.

Regulation – This seems to be evolving into the 20^th century, moving toward all commercial lines totally de-regulated. (He cited Workers’ Comp changes.)

Catastrophe response – In his view, the industry does an "outstanding job" in helping clients in this area. Claims professionals deserve a "hats off" for their efforts.

People Talent – The challenge is to recruit, nurture and develop new talent for the industry.

He sees the following "Opportunities:"

Pricing – Although he sees some increases, prices have a long way to go to make up for many years of decline. "There is something like a 20-30-point gap in where prices are today and where they need to be for us to earn a 15% rate of return."  The industry must sustain rate increases "for more than 10 minutes." To accomplish this, we need trust and respect among all parties to the transaction, underwriters willing to be firm, and producers taking on a new role, other than merely messenger of bad news.

Claims management – Cost cutting is not enough. We need to address ways to improve meeting customers’ expectation, set reserves, and appropriately settle claims. This will take serious behavioral change.

People (perhaps the "greatest opportunity") – Admitting that his perspective is "gloomy," Olsman believes that all these challenges are within the capability of people to solve. Finally, he suggested that the industry raise its standards for "human capital."

Freudberg (United National):

Jokingly, Freudberg summarized the previous remarks as, "We are a group of extremely nice people who have absolutely no way of making any money." Then he said his own remarks would be "A View from the Bottom of the swamp."  Briefly, he described UNI as primarily a surplus lines company, which also owns two admitting carriers. Handling mostly niche and specialty "program," it is the largest independently owned surplus lines insurer in U.S.

Too much capital – There is more capital in our bus than available premium dollars for us to sell. He is not optimistic about this trend and doesn’t see any way out.

Consolidation – The most dramatic area is "the giant brokers buying giant brokers." This has resulted in firms with incredible power and outcomes.   The Internet is going to be a dominant factor, because it is an easy way to distribute, especially personal lines. Also, it provides greater access to market information, so absolute lowest prices will be charged. He thinks it will "revolutionize" the insurance market.

Banks and insurance – This another piece of extra capacity coming into the marketplace.

Y2K – He considers the recent lawsuits ("sue and labor" argument) as merely foreshadowing of potential large insurance losses. If a huge economic negative comes out of y2k, there will be pressures on the insurance industry to finance it. This has been the pattern for every giant problem in our economy.

Freudberg admitted to little balance in his perspective. He is negative because it is a tough time to be in this business. But he still loves his work and is "having fun."

Stevens (Penn Mutual):

Stevens’ company (no connection to Penn Mutual Life) writes 50% personal, 40% small commercial,10% farm. Premium has grown 28% over he past 5 years and surplus has increased 300%.

Issues that are not problematic for this company: finding good people; loss ratio; buying re-insurance; new business. He agreed that the industry needs to recruit "a higher level of talent" than before.

The problem trends affecting his company (and other mutuals) include: business retention; increasing expense ratios; lack of new underwriters. He wants underwriters " who can take a rate, tailor it to a marginal risk and make it profitable."

He predicted that the market is going to harden in 4q this year, because reinsurers are consolidating and companies will want to have their reinsurance in place before December of 1999, due to uncertainty related to the Y2K issue.