Intense competition is fueling profound changes in the insurance industry.
Increasingly, companies are eliminating jobs, laying off workers, selling off less profitable lines of business, tapping new overseas markets and turning to computers to streamline their operations.And if the competition grows fiercer in the 1990s, as some experts predict, these trends most likely will accelerate, too.
Although some companies posted record profits in 1987, the watchwords among many executives are increasing efficiency, decreasing costs and enhancing revenues.
Wilson H. Taylor, president of Cigna Corp., in a memo last spring to top staff members, voiced many of the prevailing concerns about the industry's cost problems:
"To avoid the fate suffered over the last decade by many historically successful U.S. companies, we need to acknowledge that the successful companies of the future will be those who can deliver their products and services at lower costs than their competitors."
Further, Taylor said that, notwithstanding Cigna's strengths, "pressure on prices and constrained growth in mature markets present us with challenges as difficult as any we have faced in the past."
Edward H. Budd, chairman and chief executive officer of Travelers Corp., said that he hopes the industry is moving toward a "service-oriented and technology-driven kind of environment" to boost its image and profitability.
Travelers will "win or lose based on the quality of our service," Budd said. "We will use technology to deliver that service. And we will have to enhance the standards for our people in terms of their performance. "
Budd also predicted greater competition in the 1990s, spurred by a rising demand for insurance throughout society.
In additon to the normal competition among the insurers themselves, which includes price cutting among property and casualty companies, competition also is coming from new places. Corporations and municipalities, wary of the industry after escalating prices and a lack of coverage several years ago, are increasingly turning to self-insurance.
Banks and financial institutions are eager to enter the insurance business and are already starting to make inroads.
And some analysts believe that foreign insurers, including Canadian, European and Japanese companies, could present more competition in the next decade.
In response, insurance companies in the past year have cut costs and started moving in new directions. For example:
-The Hartford Insurance Group laid off 400 workers nationwide. The Travelers in June announced that 465 jobs were being eliminated, another 420 employees would be leaving the company with a voluntary severance package, and more cuts are being studied.
-Companies have invested millions in new technology. Most notable are "expert systems," computer systems with the ability to assist underwriters and other experts in decision-making.
-Insurance companies have pushed for entry into some lucrative new markets overseas, including Taiwan and South Korea, where they see untapped and expanding markets in areas such as life insurance and investment products.
-Some companies, including Travelers and Cigna, have sold some lines of business because they did not fit in with their strategic plans or because they were not as profitable as others. Travelers recently sold its surety business and Cigna last week announced the sale of the Horace Mann Cos., which sold individual and group insurance to educators.
A recent survey of insurance-industry leaders about business in the 1990s by Arthur Anderson & Co. and the Life Office Management Association also said that the intensifying competition in the 1990s poses greater financial risks for smaller insurance companies and could spur more insolvencies, mergers and acquisitions in the next decade.
In the life industry, there were 93 insolvencies in 1986 and 67 in 1987. In the property-casualty industry, there were 21 insolvenicies in 1986 and 13 in 1987.
The study also said that the recent trend toward diversification in the insurance industry has peaked. It predicted companies will focus more on improving core businesses and focusing on particular market niches, instead of moving into new lines of business in the near future.
Chief among those core businesses are property-casualty and employee-benefits insurance.
Those two businesses are experiencing financial doldrums caused partly by growing competition. The property-casualty business in recent months has entered one of its cyclical downswings as more companies slash prices to win greater market share.
But most executives and analysts predict that the current cycle will not be as painful as the one in the mid-1980s.
The near-term outlook for employee benefits, primarily health care, is cloudier because inflation of medical costs is running higher than other inflation and is now hitting insurers especially hard.
Also, there is increased competition among insurers in a growing area of employee benefits: alternative health-care systems such as health-maintenance organizations. Besides the competition, those new businesses take three to four years to become profitable because of high development costs.
To be sure, a host of other internal and external forces will have important impacts on the insurance business. Some of those most often mentioned by executives and analysts are the state of the economy, demographic changes, acquired immune deficiency syndrome, and the Washington political climate, including regulatory and legislative changes.
Nonetheless, it is competition that is the chief concern of many insurance companies.
Competitive pressures also could escalate because of the growing scrutiny that insurance companies face in Congress and in regulatory circles over two key issues - the antitrust exemption they enjoy and the taxes they pay.
Industry leaders warn of serious consequences if Congress decides to rescind their antitrust exemption under the McCarran-Ferguson Act or to raise taxes.
Robert Vagley, president of the American Insurance Association in Washington, D.C., said that if the McCarran-Ferguson Act is repealed there would be less competition and fewer companies.
"I think repeal of McCarran does have the capacity to restructure the insurance industry in a way that's detrimental to consumers and citizens alike," Vagley said.
In the wake of the liability crisis of the mid-1980s, however, there has been growing sentiment in Congress that the industry should not be exempt from antitrust regulations.
Vagley also argues that the 1986 Tax Reform Act has hit the insurance industry harder than expected. He said that his group is working to respond and to make the case that the industry's tax payment is "unfair and extraordinary."