Distribution Overpowers Underwriting. How CNA Ex-CEO Chookaszian Views Industry’s Past, Present and Future

The former chief executive of an insurance company believes the center of value of the property/casualty industry has shifted away from one of the activities that would seem to define an insurance risk-taking enterprise: insurance underwriting.

“Today, the core competency has shifted primarily to distribution and control of the customer,” Dennis Chookaszian, the former CEO and chair of CNA, told Carrier Management during a phone interview.

Sharing his views about the past, present and future state of the industry, Chookaszian said he believes Aon, Marsh, Gallagher, Willis and other large commercial brokers hold the seat of power in the industry quite simply because they command the customers and the growing portion of the profits, in sharp contrast to the situation that existed half-a-century ago, when the entities that had capital and information garnered the most profits.

Chookaszian, who is an adjunct professor of Strategic Management for the University of Chicago Booth School of Business, said that control of the customer wasn’t so important back years ago. “Now, it is critical. Everybody’s out trying to market and get new customers,” he said.

Providing some approximate profitability figures, the CPA who served as chairman of the Financial Accounting Standards Advisory Board, said that roughly two-thirds of the profits of an insurance transaction went to the underwriter in the 1950s and 1960s, with about 20-25 percent going to distribution and the remaining 5-15 percent to outside service providers such as computer system developers. Today, Chookaszian said that carriers capture only 40 percent of the profit, again giving rough numbers. With carriers holding a proportion of profits that is 20-25 percent lower than the 60-plus percent of past years, the distribution system now gets around 40 percent of the profits, and service providers get 20 percent.

“What’s happened is that the carrier has been unable to sustain the margins that they once were able to achieve, and those margins have gone to both distribution and service,” he said.

“In the end, the profitability of an insurance transaction is controlled by core competencies.” In decades past, there were two: capital and information, said Chookaszian, who also holds a Chartered Property Casualty Underwriter designation.

“It took a lot of capital to be an insurance carrier. And it was hard to get information to figure out what the risks were because 50 years ago, there were no computer systems…You couldn’t set up a captive or an MGA. You couldn’t get the data. You couldn’t get the capital. So, the insurance companies were in control, and they largely captured the profitability.”

Fast forwarding to the present day, he said, “You can get capital very easily today. And information is also very easy to obtain. There are databases available for almost anything that you want to analyze.”

Bottom line: “The core competency has shifted from essentially capital and information, primarily to distribution, and then secondarily to specialized services,” he said.

“Conceptually, there’s been a shift in power to the distribution systems. Companies like Aon and Willis and Marsh & McLennan and Gallagher are very successful…They’ve been able to charge good commissions and maintain them over the years, and they’ve been able to negotiate for contingencies. Commissions as a percentage of written premium are very similar to those of past decades, even though total premiums have risen substantially.”

He said that carrier price-earnings multiples are generally lower than multiples for insurance distribution firms such as Aon, Marsh, Gallagher and Willis, again stressing that profitability explains the difference. “The brokers are valued more highly because they are able to achieve a higher return on equity.”

“While distribution in the past was kind of sleepy, and the insurance agents would make a little bit of money,” industry competition for customers has fueled a “fundamental shift toward distribution,” he said. “It’s become so competitive that the carriers basically are always out looking for new accounts,” and in their efforts to capture new business, “they’ve got to pay more in commissions.”

“It’s very hard for them to achieve the kind of margins they once achieved for that reason,” according to the former carrier executive.

On the service side, Chookaszian said: “You’ll see companies who develop computer systems that are very important and needed systems. They can be very profitable because they have technology that is vital to the success of the carriers, and it is difficult for the carriers to build all of the technology that they need. The carriers generally search for best-of-breed software for their technology needs to complement their homegrown systems.”

The Road Forward Isn’t Clear

The road forward for carriers isn’t entirely clear in a world where technology constantly changes, where channel conflict is an issue, and where insurers are resistant to change, he suggested in answering follow-up questions about carriers changing their competencies or aligning with distribution and service providers.

What guidance might Chookaszian deliver if he were advising boards or management teams of carriers today about what they need to do to prepare for changes ahead?

“I would be pointing out that given the shift in profitability to distribution, the carriers that will be better off will try to regain some control over distribution,” he said. “But that’s not an easy thing to do. The carrier has got to develop their own distribution mechanism in order to do that.”

Chookaszian recalled that back in 1995, CNA set up the first automobile insurance website—InsWeb. “In an attempt to try to get better distribution control, systems like InsWeb were developed using the Internet to provide leads for people who were interested in buying auto insurance,” he said, explaining that an auto insurance shopper would come to the site and be directed to someone who would call them back. “That worked for a few years, and then the Internet changed. And so we changed the system at InsWeb. And then it changed again. And so every two or three or four years, the Internet would change enough so that whatever systems you had in place and the way you were doing it wouldn’t work, and you had to modify your approach again,” said Chookaszian, who still sits on the board of a successor company, All Web Leads.

A Look Back

At one point during the interview, Chookaszian also reviewed the history of Allstate, noting that the carrier’s distribution system started more than 80 years ago in the Sears store. “The only way you could buy an Allstate product initially was if you went into a Sears store, visiting a kiosk” set up specifically to sell Allstate insurance.

The evolution in distribution for Allstate would see the company opening offices outside the Sears store. Then eventually, they realized that they couldn’t get full coverage around the country, so they started using independent agents in places where they didn’t have a direct agent, he said, recalling the channel conflict controversies that ensued. Eventually Allstate expanded further into independent agent distribution through acquisition of the CNA personal lines business.

The next step came six years ago, when “Allstate in one step acquired Esurance and Answer Financial.” He observed: “They began selling policies that weren’t the Allstate brand. You could buy an Esurance policy, or you could by an Allstate product, and they were very different—different prices, different coverages.”

“Then, in addition, they bought Answer Financial, which is essentially a comparative rater,” he said, noting that a visitor to the Answer Financial website could get a price quote from many different carriers.

“Allstate went from captive distribution inside a Sears store, to captive distribution outside a Sears store, to captive distribution with them sitting side-by-side with independent agents, then expanding the independent agents into broader territories, then allowing themselves to sell a non-Allstate product with Esurance, and finally selling any product with Answer Financial. It’s been quite an evolution for them,” he said.

Evolution Continues

Asked whether he believes that the underwriting side of the business is doomed, Chookaszian said that’s not the case at all. “The business will continually change and expand and provide more innovative services. While it will continue to change, there is still a need for basic risk transfer and also the types of services that help you with risk management. Those two things are critical,” he said, noting, however, that captives and smaller entities will be able to compete on specific types of risks. “For example, a couple of college students can get together and set up in an incubator with an idea, and develop a special program to analyze data, and use it to develop predictive processes to improve underwriting or claims,” he said.

As those skills and predictive tools get stronger and stronger, “the service companies will become more profitable,” he said, explaining their growing position in terms of core competencies. “You would be impressed with what these analytical firms can tell from the data.”

Carriers have been slow to adopt predictive analytics solutions. Chookaszian said “there are companies that can take your data and provide you with improvements in underwriting or claims processes, but the challenge for the carrier is how to implement those concepts across a large operation with many offices. The idea must be able to be reduced to a procedural approach or it is not of any value.”

“Those systems are actually pretty good, but the challenge that the carrier has is how to implement them. It’s one thing to say, ‘I can predict this,’ but it’s another thing to build that into an underwriting or claims process. What do you do with the analysis? How do you take the data from your underwriting process and use the system to provide a better underwriting or claims decision?”

“So, it’s not that it can’t be done, but you’ve got to plan it. You’ve got to change the desktop of the underwriter or claims adjuster to get the benefit. The insurance industry needs stability and continuity in order to accept the risks that it takes, and has generally been slow to change.”

Should carriers invest in or acquire some of these service providers that can improve risk knowledge for slices of business with analytics?

“Acquisition of some of the service providers could be a good strategy. However, if one carrier owns a service company, other carriers are initially reluctant to use the services of the company owned by a competitor. If the service can be operated independently and can establish a strong reputation, eventually the other carriers will use the service.”

Editor’s Notes:

This article was originally published in Carrier Management, Wells Media’s publication for the P/C insurance C-suite.

Chookaszian will be the keynote speaker at the upcoming Super Regional P/C Insurer Conference 2018 sponsored by Insurance Journal and Demotech, July 22-24. Hs topic is Leadership in the New Economy.

About Chookaszian

Dennis Chookaszian is an Adjunct Professor of Strategic Management for the University of Chicago Booth School of Business. He is also the former chairman and chief executive officer of CNA Insurance Companies, and he serves as a member of the board of directors of numerous insurance services and technology companies.

In his 26 years at CNA, Chookaszian served in numerous other executive capacities, including chief financial officer, president and chief operating officer, where he was responsible for all property, casualty, life, health and investment operations, and chairman of the executive committee. He was also chairman of the Agency Management Services subsidiary of CNA (now Vertafore) and chairman of Intergroup, the HMO operation of CNA.

Prior to joining CNA, he was a management consultant with Deloitte for eight years, working on various financial- and systems-related assignments. He also served as chairman and CEO of mPower, an Internet startup providing electronic financial advice for management of 401K plans.

He has served as a director on the boards of 13 publicly traded corporations and currently serves on the boards of Career Education, a private post-secondary education provider; The Chicago Mercantile Exchange, the world’s largest derivatives exchange; Maxar, a space satellite company; Pillarstone, a real estate investment trust; and Prism, an Internet intellectual property company.

He has served on the boards of 50 private companies throughout his career and presently serves on a number of private company boards including NFP, a major insurance distribution company; Snapsheet, a photographic claim estimation service; Tech Canary, a provider of a front- and back-office technology platform for insurance agents; All Web Leads, the largest provider of leads to the insurance industry for the sale of personal insurance products; and ClaimForce, a claim adjudication company. He is also lead director of Influitive, an advocacy marketing platform.

Chookaszian also served as chairman of the Financial Accounting Standards Advisory Council from 2007 to 2011.