Tuesday, March 23, 2010
FM Global CEO: Insurance Losses are Preventable, Not Inevitable
FM Global, the mutual commercial property insurer founded by the owner of a textile mill in 1835, still operates under the same philosophy it did 175 years ago: Insurance losses can be prevented.
“If you think about it, what we are really saying is losses are preventable versus inevitable,” said Shivan S. Subramaniam, chairman and chief executive officer of FM Global. “If you want to prevent them, you need an engineering approach. If you look at [losses] as inevitable, you use an actuarial approach.”
The company regularly beats the industry average in profitability. Its combined ratio was 67.2 for 2009, and its five-year combined ratio is 77.2, according to BestLink, which provides online access to A.M. Best’s Global Insurance & Banking Database.
Those are “very good numbers that say if you focus on preventing losses, and if you work with your clients—who also happen to be your owners—you will have a successful formula. This whole approach has worked well over time. We are still doing the same thing today that we did 175 years ago, although we aren’t doing it just in New England, we are doing it all over the world,” Subramaniam said.
FM Global wasn’t unusual in having a profitable year in 2009. “It’s turned out to be an amazing year for the commercial insurance market,” Subramaniam said. The lack of natural disasters, the lack of large losses and the huge upturn in the financial markets has led commercial insurers to post strong earnings, and underwriting profits, for 2009, he said. That trend may not continue.
“Everyone has a strong balance sheet and good underwriting profits, which means the marketplace is going to be very competitive—which means there will probably be some reduction in price levels,” Subramaniam said. “If you combine that with natural disasters returning to normal levels, I think the outlook is very possible that [the industry] will have an underwriting loss this year.”
FM Global said it’s too early to have a good understanding of the biggest insurance event so far in 2010, the Feb. 27 earthquake that struck Chile. “We expect that we would end up with less than our market share of losses, due to our loss prevention work,” Subramaniam said.
FM Global is unusual in that it uses an army of engineers to both study how to prevent losses as well as work with individual clients to help them prevent losses at their particular sites.
The company recently expanded its 1,100-acre research campus to include a 70,000-square-foot natural hazards lab, which includes an earthquake table, wind lab and flood lab, which allow researches to model how natural hazards impact buildings and their contents, and what can be done to help prevent losses from happening in the first place.
For instance, FM Global’s researchers found that the corners of a building’s roof are the weak spot when exposed to strong winds. “If you focus on securing the roof at the corners, you will have a higher degree of success in keeping the roof in place when the wind is blowing very hard,” Subramaniam said. “It changed the way we look at roof design.”
FM Global isn’t shy about sharing its findings. For instance, the company has “open source” fire modeling software that allows other researchers to share and build on FM Global’s work in studying the destructive capability of fire on different materials.
“We are always seeking ways to innovate and push the cause of property loss prevention further. We aren’t interested in having proprietary knowledge about these things,” Subramaniam said. Fire is hard to test because “you have to burn things down, and once it’s burned, you have to start all over again.”
However, by developing a fire computer model, Subramaniam hopes to find a solution that is more economical. “We want to bring our expertise into play, open it to the community who want to develop better approaches to computer modeling. This way everyone benefits,” he said.
FM Global currently has a Best’s Financial Strength Rating of A+ (Superior).