Vitale: Changes Face Insurance, Risk Professionals in Next Century

By Dave Willis

"The rapid speed of change we witnessed in the 20th century will accelerate in the next millennium." That's how Mario Vitale, president of Casualty Risk Services at Reliance National, summarized the changing face of society as the final days and weeks tick by in 1999.

Speaking to a group of about 300 insurance professionals at the Annual Conferment Luncheon for the N/A New York Chapter last week, Vitale predicted world changes, then looked at specific areas where insurance and risk management might differ from today. He concluded with advice on how insurance professionals can ready themselves for the changes.

Societal and industry changes
"The lines of demarcation between working and leisure time will continue to blur," Vitale said, identifying social changes that could occur. "A timeless schedule will emerge. Just as e-mail and voice mail changed our lives in the last 10 years, hand held computers and communication devices will continue to make our time more efficient. Just as the internet never sleeps, so will the expectation that the confines of an office, a evening, a weekend or a vacation will evaporate."

"Education will be more condensed, more independent," Vitale added. "High school and college years will be shortened and post graduate education will become essential. The Internet college is not to be underestimated."

Closer to risk and insurance, Vitale suggested that the financial risk marketplace will evolve to hedge or reduce risk of new ventures. "Markets will emerge where hedgers and speculators meet to trade the futures of just about every type of imaginable risk," he said.

Y2K topped his list of insurance-specific issues. "Much has been written about systems failing come January 1, 2000 and, depending on your philosophy, it will either be a global disaster, a severe inconvenience, or a non-event," he said. "Year 2000 problems will probably impact most corporations, organizations, and government agencies to one degree or another. While the problem may have its origins in computer hardware, software and embedded chips, the solution is less a technical issue, then one of management."

"The insurance industry and reinsurance industry is braced for the economic consequences of claims filed from system failures, but many debate the real issue will come down to who pays the bill for preparation, testing and the cost of system upgrading to minimize Y2K losses," Vitale commented.

Vitale also noted that insurers are vulnerable, and have certain inefficiencies. "In insurance, for example, an average of 30 or 40 cents on the dollar goes towards expenses," he said. "This is a area where technology has the ability to stream line and reduce costs by changing how we distribute and how we process and service our business. Knowing how to expertly display efficient technology and leveraging the information that technology can harness, will provide a definite competitive advantage."

"Like so many other industries our industry has been greatly impacted by the effects of mergers and acquisitions," Vitale noted. "The pressure for growth, leverage and profits via reduced expenses has led to consolidation at every level. Local agents, alphabet brokers, insurance companies, and reinsurance companies have had major activity in this area.

"The names of companies we grew up with in the business like Continental and the Home, or brokers like A&A or J & H no longer exist," he said. "Two mega-brokers now control most of the commercial U.S. marketplace. These are all realities we must deal with."

"Finally, firms in all the insurance sectors continue to acquire business that can enhance their product and services offerings," Vitale said. "We expect these types of acquisitions to continue as "value-added" has become a catchword among industry players.

"Investors have tended to be hesitant this year – indeed since mid-1998 – about insurance related stocks," he said. "Of the eight IPOs and secondary offerings in 1999, only two were pure insurance plays, and one of them was a demutualization. Of the rest, three offerings capitalized on the stampede for Internet stocks, and two were related to health care. Although capital market sentiment is notoriously difficult to predict, in the near term, stock offerings may be a difficult sell because of the ongoing pressures in the insurance industry. However, continued interest in demutualization in the life sector will generate some activity there.

What it will take to survive
Vitale challenged the attendees to continue to develop themselves professionally. "The skill sets we must acquire or more accurately refine are certainly different then just those we possessed in the 20th century," he said. He listed several things insurance pros of the 21st century will need to master.

"They certainly will need to develop a full understand of financial risk and a complete set of skills to manage that risk," Vitale said. "The days of dealing with hazard risk or event risk alone are gone. Today operational risk and financial risk are added to the equation so that enterprise wide risk management is the name of the game.

"Risk Managers, Brokers, Underwriters, etc. must deal with "total risk" and why not?," he asked. "Risk is Risk. CFO's and treasurers and their bankers look at risk this way, why not their insurance team? Currency risk, commodity risk, interest rate risk are all as important to a companies earnings potential as products liability or a fire at a key factory."

"As traditional banking, trading and insurance boundaries become less clear, the relative efficiency of insurers and capital markets will become increasingly important," Vitale said, pointing to another area expertise will matter. "The winners will be organizations that can create efficient risk transfer structures that don't require their customers to place their risk in neat boxes. The trend towards enterprise risk management will require the marketplace to address unacceptable levels of volatility with integrated structures that seamlessly produce desired outcomes. The market best able to meet these needs will grow and prosper.

"What is clear is that the next generation of risk management tools will be designed by those mathematically skilled and sold by those who find creative, efficient reductions to frictional costs," he said.

"We will all need to be better team players," Vitale said. "Just as Citigroup today is lead by a triad of professionals. We will not be expected to be experts in every financial field – but we will be expected to work together better, leveraging each other's strengths for the good of the whole.

"We will need to stay on top of all the technological advancements in business and apply this technology to our industry more rapidly. We as an industry have lagged far behind," he said. "We must devote more of our capital budget to I.T. advancement and spend more time individually developing the skills to apply new technology to our expense problems and our distribution challenges."

Vitale concluded, "We need to develop global economic skills. Corporations now virtually all think global. The marketplace is now global in scale. The internet is global in scope. You must be ready to address the problems and opportunities with global solutions."