Sailing on a Rising Tide.Centennial spotlight: This is the first in a series of historical perspective articles on the insurance industry. I have been at the helm of A.M. Best Co. since 1965, and during the past 35 years I have had the good fortune to see my company grow with the insurance industry. Our corporate objective, adopted in 1967, is a simple statement, "To be a constructive force serving the insurance industry." Recently, we quietly celebrated the 100th anniversary of A.M. Best Co., which was incorporated Dec. 13, 1899. I thought the best way to celebrate our centennial and the millennium would be to feature a Special Centennial Section in Best's Review devoted to the history of the insurance industry. This regular monthly section in Best's Review will be titled "Looking Back." Two years ago, I gave a speech in Palm Springs, Calif. at a meeting of insurance company executives hosted by A.M. Best. The theme of the conference was growth, and my speech was titled, "How Did We Get Here and Where Are We Going?" I talked about the birth of the insurance industry and the major factors that contributed to its growth. I concluded with a five-year projection of the industry's growth through 2002. I thought this speech might be an interesting beginning for our Special Centennial Section. So relax, turn the clock back to Feb. 6, 1998, and join me in Palm Springs. How Did We Get Here and Where Are We Going? Good morning. My name is Art Snyder, and I would like to welcome you to Palm Springs and our fifth annual Review & Preview Conference. As many of you know, the primary purpose of this conference is to once a year assemble key executives of the life/health and property/casualty insurance industry for the purpose of discussing the performance and challenges confronting us. Traditionally, key members of our staff provide a Review of last year's financial performance and a Preview of the performance we anticipate for the coming year. We also invite a number of outside speakers to give you their viewpoints on the current status of the political, economic and competitive issues facing the industry and our country. Our prior conferences were dominated by what I would classify clas·si·fy tr.v. clas·si·fied, clas·si·fy·ing, clas·si·fies 1. To arrange or organize according to class or category. 2. To designate (a document, for example) as confidential, secret, or top secret. as hostile regulatory and political issues, such as: 1) federal oversight of the insurance industry; 2) tort tort, in law, the violation of some duty clearly set by law, not by a specific agreement between two parties, as in breach of contract. When such a duty is breached, the injured party has the right to institute suit for compensatory damages. reform, to limit punitive pu·ni·tive adj. Inflicting or aiming to inflict punishment; punishing. [Medieval Latin p  n damage awards;
3) Superfund reform, to repeal The Annulment or abrogation of a previously existing statute by the enactment of a later law that revokes the former law. The revocation of the law can either be done through an express repeal retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a liability; 4) market-conduct issues, such as policy churning Firing one group of employees and hiring another. As companies move into newer, high-tech ventures, they often eliminate employees with older skills while bringing on new people who have computer programming, networking and Web experience. and redlining Identifying text that has been changed in a word processing document by displaying it in a special color, for example. It allows the original author of the text or other users to see ongoing revisions. The term comes from manual editing where a red pen is used to mark up the pages. ; 5) federal reform of health care; and 6) banks in insurance. The theme for this year's conference is going to focus on a more positive subject--growth. The major topics on the agenda will address the issues that currently impact the industry's future rate of growth, namely technology, demutualization Demutualization The process of changing corporate structure from a mutual fund company to some other form, such as a limited liability or corporation. Notes: This means mutual/life insurance companies convert from policyholder companies to stock companies. , consolidation, globalization globalization Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation and the proposed dismantling dis·man·tle tr.v. dis·man·tled, dis·man·tling, dis·man·tles 1. a. To take apart; disassemble; tear down. b. of the Glass-Steagall Act The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business. . During the past seven years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time insurance industry has been stalled stall 1 n. 1. A compartment for one domestic animal in a barn or shed. 2. a. A booth, cubicle, or stand used by a vendor, as at a market. b. in a soft market. Recently, I often have been asked, "Where will the industry be by the year 2000?" I am sure many of you have been asked the same question, and I know all of you have thought about it. This morning, I would like to share with you my thoughts on the future growth of the insurance industry. I do not have a crystal ball, but I do have access to information on how the industry got to where it is today. Often, knowledge of the past is helpful in forecasting the future. Therefore, I am going to condense con·dense v. con·densed, con·dens·ing, con·dens·es v.tr. 1. To reduce the volume or compass of. 2. To make more concise; abridge or shorten. 3. Physics a. 250 years of history concerning the growth of the insurance industry into a 30-minute presentation, which I have titled, "How Did We Get Here and Where Are We Going?" It is generally accepted by historians that the business of insurance began in Edward Lloyd's Coffee House located on Town Street in London around 1688. Lloyd himself was not involved in insurance, but his coffeehouse was used by ship captains, merchants and investors to carry on their business of insuring ships and their cargoes. Those who participated in a risk signed their names, one under the other, on the policy with the amount they agreed to cover. For this reason, they were known as "underwriters." From this humble beginning in a coffee shop, Lloyd's of London Not to be confused with Lloyds Bank or Lloyd's Register. Lloyd's of London is a British insurance market. It serves as a meeting place where multiple financial backers or “members”, whether individuals (traditionally known as emerged and its name became synonymous with synonymous with adjective equivalent to, the same as, identical to, similar to, identified with, equal to, tantamount to, interchangeable with, one and the same as the word "insurance." First U.S. Insurer We can attribute the founding of the American insurance industry to Benjamin Franklin, who on March 25, 1752, incorporated under the laws of Pennsylvania a company chartered as The Philadelphia Contributorship for the Insurance of Houses from Loss by Fire. He also established a private fire department to protect the buildings his company insured. To identify these buildings, he had a medallion nailed on each building. These medallions became known as fire marks. The company has been in continuous operation for 245 years, under the same name, and currently enjoys a Best's Rating Best's rating A rating A.M. Best Co. assigns to insurance companies based on the company's ability to meet its obligations to its policyholders. of A+. As Ripley would say, "Believe it or not!" (Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : Downgraded to an A in July 1999). We can facilitate our review of the growth of America's insurance industry by segmenting its development into five benchmark years: 1750, 1900, 1946, 1990 and 1997. As shown by Exhibit I (below), the population of the 13 colonies in 1750 was estimated at 1 million people. By 1900, the population had grown to 76 million, and America emerged as an industrialized in·dus·tri·al·ize v. in·dus·tri·al·ized, in·dus·tri·al·iz·ing, in·dus·tri·al·iz·es v.tr. 1. To develop industry in (a country or society, for example). 2. nation on a peer with its European parents. It seems hard to believe, however, that after 150 years America's insurance industry, in a growing industrial environment with 76 million people, would generate only $600 million of premium income in 1900, or just $8 per capita [Latin, By the heads or polls.] A term used in the Descent and Distribution of the estate of one who dies without a will. It means to share and share alike according to the number of individuals. . From 1900 to 1946, America continued to grow. When World War II ended, America emerged as a superpower and the population had almost doubled to 138 million people. But the premium income of the insurance industry in 1946 had grown to only $10 billion, lagging Lagging Strategy used by a firm to stall payments, normally in response to exchange rate projections. well behind the economic growth of the country. Further, the average annual growth rate of the population during this period declined from 3% to 1.3%, the flow of immigrants being interrupted in·ter·rupt v. in·ter·rupt·ed, in·ter·rupt·ing, in·ter·rupts v.tr. 1. To break the continuity or uniformity of: Rain interrupted our baseball game. 2. by World War I, the Great Depression and World War II. The next 44 years provided the insurance industry with a wild ride. Premium income grew from $10 billion in 1946 to $493 billion in 1990, representing an average annual growth rate of 9.4% during this period. To put it another way, the premium income of the insurance industry doubled every eight years for 44 years, and the annual premium income of $8 per capita in 1900 had increased to almost $2,000 per capita by 1990. As you might recall, 1990 ushered in the soft market. At work were factors that put pressure on the continued accelerated growth of premium income. As a result, premium income increased from $493 billion to $681 billion by 1997, but the average annual growth rate declined from 9.4% to 4.8% through 1997. As shown by Exhibits II and III (on page 43), all lines of insurance participated in the growth of premium income from $10 billion in 1946 to $681 billion in 1997. But the winner was a dark horse. Premium income for annuities was only $22 billion in 1980, the smallest of the six major categories of insurance. But by 1990, in just 10 years, annuities surged from $22 billion to $130 billion and took over first place. Its accelerated growth rate continued and in 1997 annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. premium income totaled $198 billion, 50% more than auto premium income, which was a distant second at $132 billion. Perhaps even more significant is that today, annuity premium income represents almost 30% of the insurance industry's total premium income of $681 billion, and the outlook for its continued growth is very positive assuming a continued strong securities market. Post World War II Growth Era Is there an explanation as to why the insurance industry, after being essentially dormant Latent; inactive; silent. That which is dormant is not used, asserted, or enforced. A dormant partner is a member of a partnership who has a financial interest yet is silent, in that he or she takes no control over the business. during its first 200 years, suddenly experienced a surge in its premium income growth from $10 billion in 1946 to $681 billion in 1997? To put it more dramatically, more than 98% of the growth of the insurance industry since 1900, occurred during the past 50 years. Why? Obviously, there were many contributing factors, but the cornerstone cornerstone Ceremonial building block, dated or otherwise inscribed, usually placed in an outer wall of a building to commemorate its dedication. Often the stone is hollowed out to contain newspapers, photographs, or other documents reflecting current customs, with a view to of this growth was our entrance into World War II on Dec. 7, 1941, when Japan bombed Pearl Harbor Pearl Harbor, land-locked harbor, on the southern coast of Oahu island, Hawaii, W of Honolulu; one of the largest and best natural harbors in the E Pacific Ocean. In the vicinity are many U.S. military installations, including the chief U.S. . During the next four years, America committed its resources to building a huge industrial capacity to supply, not only our own military needs to fight on two continents but the military needs of our allies. It represented the greatest industrial expansion in the history of mankind MANKIND. Persons of the male sex; but in a more general sense, it includes persons of both sexes; for example, the statute of 25 Hen. VIII., c. 6, makes it felony to commit, sodomy with mankind or beast. Females as well as males axe included under the term mankind. Fortesc. 91; Bac. Ab. . At the end of World War II End of World War II can refer to:
With the surrender of Germany and finally Japan in September 1945, America immediately began to retool re·tool v. re·tooled, re·tool·ing, re·tools v.tr. 1. To fit out (a factory, for example) with a new set of machinery and tools for making a different product. 2. its awesome industrial capacity to satisfy a domestic and worldwide need for consumer products and industrial equipment. The primary economic factors that propelled the growth of insurance premiums after World War II was the surge in industrial growth coupled with a steady increase in real wages defined as actual wages adjusted for inflation. The increase in real wages provided a rising standard of living, which, in turn, produced a growing demand for insurable products, such as automobiles and homes. The demand was accelerated by a growing population, which doubled from 138 million people in 1946 to 267 million by 1997. During this period, corporations introduced employee-benefit programs such as group life insurance, retirement-income plans and health-care benefits, which produced a comparable surge of premium income for the life insurance industry. The other lines of property/casualty insurance also benefitted by the growth of the economy and population. The real stimulus for their growth, however, was the alteration of the tort-liability system, which particularly impacted workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. , auto liability, product liability, medical malpractice Improper, unskilled, or negligent treatment of a patient by a physician, dentist, nurse, pharmacist, or other health care professional. and environmental pollution. In the pursuit of social change, the courts in the early 1960s began to alter the tort laws A body of rights, obligations, and remedies that is applied by courts in civil proceedings to provide relief for persons who have suffered harm from the wrongful acts of others. , which had been adopted from English common law. By 1975, we had significantly modified more than 200 years of legal tradition, creating a system that no longer provided a clear definition of an insurer's legal or financial exposure as provided by its contracts for liability coverage. As a result, liability damage and punitive awards grew rapidly in amount and frequency Understandable, when you consider that our country harbored 70% of the trial lawyers in the world and the insurance industry was identified as having deep pockets. This forced an escalation es·ca·late v. es·ca·lat·ed, es·ca·lat·ing, es·ca·lates v.tr. To increase, enlarge, or intensify: escalated the hostilities in the Persian Gulf. v.intr. of premium rates and increased the need for liability coverage. As a result, premium income for these lines grew from $1.5 billion in 1946 to $88 billion in 1997. That's the good news. These figures indicate that we currently have a financially strong and growing insurance market. The bad news is, as they say on the Hertz hertz (hûrts) [for Heinrich R. Hertz], abbr. Hz, unit of frequency, equal to 1 cycle per second. The term is combined with metric prefixes to denote multiple units such as the kilohertz (1,000 Hz), megahertz (1,000,000 Hz), and gigahertz rental car ad, "Well...not exactly!" 1990--Growth Rate Declines We are all aware of the slowdown For articles with similar titles, see Slow Down (disambiguation). A slowdown is an industrial action in which employees perform their duties but seek to reduce productivity or efficiency in their performance of these duties. in the growth rate of the insurance market since 1990. Net premiums written are no longer doubling in size every eight years. (Exhibit III compares the annual growth rate of the six major lines of insurance for the years 1946-1990 and 1990-1997.) As shown, the average annual growth rate for the 1946-1990 period was 9.4 % compared with 4.8% for the 1990-1997 period. To explain what is happening, let's take a look at the auto line, which in 1997 had $132 billion in net premiums written, but its average annual growth rate had declined to 4.7%, compared with an average annual growth rate of 10.4% for the 1946-1990 period. In 1946, the population was 138 million and there were 29 million registered passenger vehicles--a ratio of about five people per vehicle. By 1997, the population had grown to 267 million, and registered passenger vehicles to 136 million--a ratio of about two people per vehicle. Therefore, if the average family unit is two people, the market-demand curve for vehicles has been saturated saturated /sat·u·rat·ed/ (sach´ah-rat?ed) 1. denoting a chemical compound that has only single bonds and no double or triple bonds between atoms. 2. unable to hold in solution any more of a given substance. . Future growth in the number of vehicles will depend primarily on population growth, which has declined from an average annual growth rate of 1.3% in 1946 to 1% in 1997. This does not appear to be a significant reduction, but 1.3 reduced to 1 is a reduction of 23%! The current soft market, created by excess capacity, also has put pressure on price increases. As noted in Exhibit 111, we have projected that the cumulative effect of these factors is an average annual growth rate of premium income for the auto line of 3.5% for the 1997-2002 period vs. 4.7% for the 1990-1997 period. The factors contributing to the current decline in the growth rate of premium income for the auto line are common in varying degrees to the entire insurance market and can be summarized as follows: 1) saturation saturation, of an organic compound saturation, of an organic compound, condition occurring when its molecules contain no double or triple bonds and thus cannot undergo addition reactions. of the market demand for insurable products, such as autos, houses and life insurance; 2) 20% decline in the average annual growth rate of our population from 1.3% to 1%; 3) 60% decline in inflation from 5% for the 1990-1997 period to 2.5% projected for the 1997-2002 period; and 4) competitive market conditions caused by an estimated 20% of excess capacity, which has restrained price increases. Time does not permit an in-depth discussion of the outlook for the average annual growth rate we have projected for the other five lines of insurance, but I can provide the following comments: * The property lines have not reached auto's level of saturation of market demand. Therefore, we are forecasting a modest recovery from the slow period of growth during the 1990-97 period of 3.5% and project a recovery in the 1997-2002 period to an average annual growth rate of 4%. * We project a reduction of the 1.8% average annual growth rate in premium income for the other lines to 1.5%, reflecting the current stable market conditions for the majority of the lines of insurance represented by this category. Hopefully, Congress will continue its efforts to provide meaningful tort reform that could further stabilize stabilize See peg. this line. * During the past five years, the premium income growth of the life/health industry has been largely driven by the annuity line. The strong performance of the stock market coupled with increasing life expectancy Life Expectancy 1. The age until which a person is expected to live. 2. The remaining number of years an individual is expected to live, based on IRS issued life expectancy tables. has fueled the shift from life insurance products to investment products, such as annuities. We expect this trend to continue and, accordingly, have increased the average annual growth rate of annuities from 6.1% to 7.5% for the 1997-2002 period. The strong growth rate of annuities will offset the continued decline projected for life and accident/health. Outlook for the Future Based on these projections, the outlook for the growth of premium income for the 1997-2002 period is 3% for property/casualty and 6% for life/health, resulting in an average annual growth rate of 4.7% for the total industry vs. 4.8% for the 1990-97 period. It is important to emphasize that the insurance industry is essentially consumer driven. The beneficiary beneficiary Person or entity (e.g., a charity or estate) that receives a benefit from something (e.g., a trust, life-insurance policy, or contract). A primary beneficiary receives proceeds from a trust or insurance policy before any other. of the life/ health industry's $405 billion in premium income is primarily the consumer. The property/casualty industry's $276 billion is approximately split between personal and commercial lines. Therefore, almost $475 billion, or 70%, of the industry's $681 billion of 1997 premium income, currently is derived from the consumer-related purchase of autos, homes, annuities and life insurance. When the saturation point saturation point n. 1. Chemistry The point at which a substance will receive no more of another substance in solution. 2. The point at which no more can be absorbed or assimilated. is reached for any one of these markets, premium income growth must be derived from population growth, inflation and/or upgrading, such as purchasing a more expensive car or home. The question, of course, is: How close are we to the saturation of the market demand for insurable products, such as autos, homes and the purchase of life insurance? My personal opinion: closer than you think. I believe a closing comment is also in order on the growth opportunities of globalization. The growth pattern of the American insurance industry during the past 250 years challenges the theory that a developing industrialized country is fertile fer·tile adj. 1. Capable of conceiving and bearing young. 2. Fertilized. Used of an ovum. ground for a growing insurance market. It suggests that caution be exercised in the pursuit of growth via globalization. At the moment, the American insurance industry, with the exception of a few large companies, has neither the capital nor experience to make a meaningful entry into foreign insurance markets, many of which are already being actively pursued by the large European financial-services conglomerates A Conglomerate is the term used to describe a large corporation that consists of diverse divisions. Conglomerate companies tend to be large multinational corporations with operations in multiple regions of the world. . The problem is further complicated by the financial instability of many developing industrialized countries and, the more intriguing in·trigue n. 1. a. A secret or underhand scheme; a plot. b. The practice of or involvement in such schemes. 2. A clandestine love affair. v. question, where are they on the growth curve of their insurance market? These are some of the challenges, gentlemen, that you will be confronting between now and 2000 as you pursue growth. My interest in the subject of growth is perhaps more like the captain of a Coast Guard station when he hoists two red flags to advise the local boats at sea to be alert for bad weather. This morning, I am raising two red flags advising the executives of the insurance industry to be prepared for a slowdown in the growth of the domestic insurance market. Sailors SAILORS. Seamen, mariners. Vide Mariners; Seamen; Shipping Articles. have a saying, "If you're not sure of your course into a harbor, sail it on a rising tide Noun 1. rising tide - the occurrence of incoming water (between a low tide and the following high tide); "a tide in the affairs of men which, taken at the flood, leads on to fortune" -Shakespeare flood tide, flood ," From 1946 until 1990, the management of the insurance industry has had the benefit of sailing on a strong rising tide. We have been in a very competitive market for more than eight years now, and I do not believe we can depend on a strong rising tide in the near future. I believe the future success of an insurance company will more than ever depend on the vision and skills of its management. I hope my talk this morning and those that follow will contribute to your preparation for the job ahead. Closing Comments and Looking Ahead With those comments I concluded my talk in Palm Springs. Recently, I reviewed the industry's actual performance for 1998-1999 and compared it with the 1997-2002 forecast, which projected a continuation of the slowdown in the annual growth rate of the insurance industry from 9.4% (1946-1990) to 4.7%. Recent trends confirm the forecasted slowdown. Perhaps we should conclude this report with a brief discussion of the recent use of the Internet to market and sell insurance products such as auto policies and life insurance. What role will the Internet play in affecting the long-range growth, profitability and structure of the insurance industry? It is generally agreed that automobile policies will initially be the most popular insurance product to be sold on the Internet. It's a huge market with 136 million registered passenger vehicles generating approximately $100 billion in premium income. The policies are relatively standard and renewed annually. But the majority of auto policies are sold through agents and there is high customer loyalty to the agent and/or the company with a limited knowledge of comparative pricing. For this reason, we believe the consumer will move slowly to the lower-cost auto policies offered on the Internet. But as the consumer becomes more accustomed to shopping online and insurers intensify in·ten·si·fy v. in·ten·si·fied, in·ten·si·fy·ing, in·ten·si·fies v.tr. 1. To make intense or more intense: their Internet sales programs, company/agent loyalty will erode Erode (ĕrōd`), city (1991 urban agglomeration pop. 361,755), Tamil Nadu state, S India, on the Kaveri River. The city is located in a cotton-growing region, and its industries include cotton ginning and the manufacture of transport equipment. . The dynamics of the Internet market are favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. for the sale of simple term life and annuity products, but I believe Internet sales of these products will initially lag the auto market. Therefore, we do not anticipate the Internet will impact our forecast of an average annual growth rate for auto premium income of 4% for the 1997-2002 period. But the long-range impact of insurance industry embracing the sale of their products on the Internet does pose several problems. Can the industry offset price reductions with the presumed lower-cost distribution channel of the Internet without dismantling or significantly restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). the agency system? The challenge for insurers competing in the 21st century will be how to embrace the benefits of the Internet as a distribution channel while maintaining a competitive advantage and customer loyalty. I trust you will join me in the next issue for "Looking Back."
U.S. Population & Insurance Premium Growth
U.S. Population Net Premiums Written
Year Millions % AGR $ Billion % AGR
1750 1 - $0.0 -
1900 76 3.0% 0.6 -
1946 138 1.3% 10.0 6.4%
1990 249 1.2% 493.0 9.4%
1997 267 1.0% 681.0 4.8%
2002 280 1.0% 855.0 4.7%
Note: % AGR is the "Annual Growth Rate" between
Periods; i.e., the % AGR for the U.S. Population
growth from 1900 to 1946 was 1.3%.
U.S. Insurance Industry
Product Line Premium Trends
($ Billions)
Net Premiums Written
1946 1990 1997 2002
Auto [a] $ 1.2 $ 96 $ 132 $ 157
Property [b] 1.3 44 56 68
Other 1.5 78 88 95
All P/C $ 4.0 $218 $276 $320
Life $ 5.0 $ 79 $120 $150
Accident & Health 0.2 66 87 100
Annuity 0.8 130 198 285
All L/H $ 6.0 $275 $405 $535
Total $10 $493 $681 $855
(a.)Includes private and commercial liability
and physical damage insurance.
(b.)Includes fire, allied, and multiple peril insurance.
U.S. Insurance Industry
Product Line Growth Trends
% Annual Growth Rate
Net Premiums Written
1946-90 1990-97 1997-02
Auto 10.4% 4.7% 3.5%
Property 8.3% 3.5% 4.0%
Other 9.4% 1.8% 1.5%
All P/C 9.6% 3.4% 3.0%
Life 6.5% 6.2% 5.0%
Accident & Health 14.0% 4.1% 2.5%
Annuity 12.0% 6.1% 7.5%
All L/H 9.3% 5.7% 6.0%
Total 9.4% 4.8% 4.7%
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