WTW’s Jon Drummond sits down with The Hartford’s Mo Tooker and talks tech, talent, market cycles, the future of the industry, the state of the market and more.
JON DRUMMOND: Mo, thank you for joining us for our first View from the Top interview. We’ll be covering a few topics today, so let’s start with one that’s close to the theme of Insurance Marketplace Realities: How would you characterize the market today?
MO TOOKER: It’s a competitive market with two predominant risk issues impacting the industry – extreme weather and legal system abuse. At The Hartford, we remain keenly focused on these two macroeconomic issues and the implications they may have for loss costs. However, barring a major catastrophic event, we believe the rational nature of this market will continue for the next few quarters with healthy competition for new business.
JD: Do you think there is any segment - middle market versus large accounts, for instance - that is stronger or better positioned from a rate adequacy standpoint?
MT: We see an improving rate environment in the smaller commercial insurance segment. However, when we look at larger, more complex businesses, we see more and more competition in the field, and if this competition serves as a proxy for rate adequacy, it suggests that the market may believe large accounts have experienced appropriate remediation.
JD: Moving away from segment and looking at the market through a product lens, is there one line of business that you think is structured or priced better than the others?
MT: The property market has been in a state of flux for the past three to five years. The terms are generally tight. Valuations have certainly improved, and recent years have brought rate momentum that has put us ahead of trend. We’re also seeing reinsurance capacity coming back into the space, and that competition is driving better terms for retail insurers.
JD: At WTW, we’ve also seen a pursuit of property market share. That reveals another challenge facing our industry, which is market cyclicality. Market cyclicality makes it difficult for clients to manage budgets and costs. As an industry, how do we mitigate the excessive rate volatility that occurs when carriers push up rates and then chase them down? Are we ever going to kick this trend?
MT: We’re optimistic. As capital providers, it’s not lost on us that this kind of cyclicality can be frustrating for our customers, and that it also creates challenges for our brokers and agents. The complexity of the capital chain – particularly in the reinsurance and retrocessional space, where alternative capital can quickly enter and exit the market – will inherently drive some levels of cyclicality. With that said, we believe data and analytics will help the industry attenuate this volatility, and there’s already been some evidence pointing to this. Another factor that may help is that investors – certainly where our shareholders at The Hartford are concerned – are very much willing to pay for quality, consistent earnings. If the investor base is demanding more consistency, in both profitability and customer experience, it might lead to more stability from insurers.
JD: Given your view that we’re in a rational market, is there a product line that makes you particularly uneasy?
MT: Liability is probably the most challenging line of business today due to the unpredictable litigation environment. The impact of legal system abuse has been monumental. Claims that may have cost the industry $1 million in the past may now be multiples of this. We are focused on keeping up with claims trends, contractual risk transfer and managing capacity closely, as well as asking clients to assume more risk.
JD: That’s an interesting point, and I would also suggest the industry needs to stay relevant. Over the past couple of years, our clients have successfully used their own balance sheet to finance risk. Not only does that pull premium out of the market, but it also challenges clients to think outside of conventional channels for addressing risk. Is that a good or bad thing?
MT: It’s hard to say. However, as far as the risk that these companies are taking on their own balance sheet, it is concerning because we don't think they're collecting enough price in their product to pay for it. The decision also seems like a short-term answer driven by the idea that if a company can assume their risk now, then you can control the cost. But, when we consider this decision over a decade, it is possible that the volatility of the risk can come through on an income statement in a different way.
We recently looked at the insurance industry's ROIs relative to every other segment in the S&P 500 such as financial services, real estate, and food, and we discovered that over 10 and 20-year periods, the insurance industry's ROIs lagged the S&P 500 ROIs by five points. Even in 2023, all industries ran an 18-percent ROI, and insurance ran a 13-percent. As an industry, we have a long way to go to match the profitability of other industries.
JD: You have a diverse background that spans both reinsurance and retail insurance. How do you see the capital chain evolving, and why? Who do you think will be at the forefront of that change?
MT: It's a fluid situation where traditional boundaries are coming down as some retail and wholesale brokers are finding ways to take risk in their own way with some of their own capital. You also have reinsurers trying to get close to the customer, and in terms of MGAs, there’s a blurring of the traditional relationships of how capital was provided to an MGA through an insurer. People are generally trying to figure out how they can get paid for the capital they provide.
JD: The MGA movement is stronger now than ever before. How will this help the industry evolve? As a more conventional capital provider, do you have any concerns about the movement?
MT: The data that we have reviewed over the past five-to-ten-year period shows that the capital provider behind an MGA ends up losing on average. While there are MGAs that make money for their capital providers, it has not been consistent. Customers may win because they're getting hyper-specialized underwriters and talent may also win because they get paid well for their underwriting skills, but it is not the case on average. While there are MGAs that succeed, where the alignment is perfect and everything works out well for everybody, that is not the case in every circumstance, especially when we look at the aggregate data over time.
JD: The Hartford has made a lot of investment and progress in the digital era. How do you expect digitization to impact the insurer, broker, and client relationship? How will digital trading improve the client experience?
MT: The pace of investment is such that those who are ahead will likely stay ahead. Speed of transaction just means so much where small and medium-sized risk is concerned. Many of our brokers and producers want to get a quick, reasonable answer back to their customer. At The Hartford, we are focused on creating a stellar experience for the agent. We think our product offerings and customer-focused approach is a competitive advantage, and we believe it’s how the industry will compete in the long-term.
JD: How do you still create that client experience - and are you worried about that client experience?
MT: Sometimes a client will come in with high expectations, and while they might be met on one product, they might not be met on another product, or they might get something in one geography, but maybe not in another geography. So, there’s opportunity to enhance that experience. We want to create consistency and we want things to feel as streamlined and frictionless as possible for clients when they need us.
For sure, we’re already driving improvements in communication and creating ease wherever we can. We have third party data that’s helping us around change detection and providing exposure data. We can see changes in an insured, whether they remember to tell us or not. And we can bring all that information forward at renewal, so it's already largely complete without needing more information from them. Hopefully, this will make customers feel that we’re reducing the amount of work on their plates and making it easier for them to feel confident with their coverage.
The other bet that we're making is that with all the data that we are collecting, we will have more and more of an ability to bring the total cost of risk down for small, middle, and large customers.
JD: Meaning there’s more to be won than lost on risk mitigation and risk management?
MT: We’re not just asking if we can we create a joyful experience, but also if we can create a frictionless experience that’s helping customers manage their own risk. We think that's where it’s going, just with the data we're all collecting. And if we can provide that experience for the customer, hopefully there will be a retention benefit over time as well. That would be good!
JD: The industry has seen a lot of Insurtech start-ups come and go over the past few years. What kinds of Insurtech do you think have staying power, and have proven valuable to The Hartford? What’s worked for you when it comes to introducing technology into the insurance world, driving down lost costs, and improving overall risk control?
MT: I agree with your characterization of Insurtech. As for what's working for us, we’ve found several firms that are bringing unique data solutions, and combining data sets in ways that are creating real value for us. One classic example is aerial imagery that can look at roof lines and see if a building has changed. Another one is in the world of IoT devices and data collection. Startups are asking, how can we capture data in a behavior-or-usage-based format that allows us to design solutions. This is because we're willing to pay for devices and technology solutions that can mitigate risk and help us provide data for both customers and risk management solutions. Those two areas - unique data sources and unique risk mitigation products – are where we have found particularly compelling products. And we're willing to pay for those because they help make the customer better - and they make us better, too.
JD: This is interesting, because of what you’ve seen with some behavior-based underwriting models, and how they haven't been as successful as you'd think.
MT: Sometimes, it's about timing. It's not that these things are fundamentally flawed, but rather it's that they’re going to take a lot longer to get right than some firms may have thought. What we have found is that there are some basic challenges such as my driver doesn't really want to be tracked, or my driver doesn't really want his data shared. We get it. It's playing out slowly, which is slowing progress right now. We suspect though that we'll move through it over time. It's premature to think that some things are going to take off right now when we haven't worked through some of these more fundamental questions.
JD: Finally, in the spirit of Marketplace Realities, I’d like to ask you to put on your Nostradamus hat and project market conditions for the next couple quarters. What do you think our readers can expect to see from the market?
MT: I don’t feel comfortable making macro predictions over five-to-ten-year periods. But, in the next two to three years, I think that some of the macros we've been talking about will still be present. For example, legal system abuse is still a risk we need to watch. As a result, the buyer of a casualty product is likely to be paying more year-on-year until we can mitigate for legal system abuse. In addition, if we have a stable property market, then we may have a little more capital coming in.
However, it's still going to be about supply and demand, especially in the specialty insurance market. For example, we're seeing some pressure on the cyber insurance market now as more competition enters. This will be helpful for buyers.
Meanwhile in workers compensation, we see downward trend for the foreseeable future with a continued focus on worker safety and greater improvements in risk management practices. Broadly, we think the insurance market has been able to take those advances in frequency and get paid for the severity risk in a way that is competive, and we see that continuing.
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