Robert Hartwig – Director of the Center for Risk and Uncertainty Management, and Clinical Associate Professor at the University of South Carolina, and Immediate Past President of the Insurance Information Institute


Robert Hartwig – Director of the Center for Risk and Uncertainty Management, and Clinical Associate Professor at the University of South Carolina, and Immediate Past President of the Insurance Information Institute

Robert P. Hartwig, Ph.D., CPCU: The Big Picture on Insurance – What You Need to Know

Dan Kennedy used to say, ‘School’s never out for the pro’. Well, school is about to start. And our teacher is one of the most respected observers the insurance industry has ever known. If you want to know how to ‘boost your agency Instagram followers by next Tuesday’, this isn’t the podcast episode for you.

But, if you want to know – and you should – the current state of the industry, the forces that are driving it, where it’s going and how to respond strategically, drop everything and listen.

Many consider Dr. Hartwig to be the voice of the industry to the public. You may have heard or seen him on ABC, CBS, NBC, CNN, CNBC, Fox, PBS and the BBC. Or, perhaps you’ve seen him quoted in The Wall Street Journal, The New York Times, USA Today, Washington Post, Los Angeles Times, Financial Times, BusinessWeek, Newsweek, U.S. News & World Report, CFO, Fortune, Forbes, The Economist and many others throughout the world.

There’s a reason the world has called on Dr. Hartwig to explain insurance. Few understand it as deeply as he does. Take this rare opportunity to learn from one of the industry’s most esteemed masters.

What are other agents & brokers doing to thrive? What are the biggest trends affecting the retail insurance agent & broker? What are the most important strategies and tactics you need to grow faster? Find out here in the Connected Insurance Podcast, where Michael Jans discusses the biggest issues affecting the independent insurance agent and broker with the industries leading figures.


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[Transcript] Robert Hartwig – Director of the Center for Risk and Uncertainty Management, and Clinical Associate Professor at the University of South Carolina, and Immediate Past President of the Insurance Information Institute

Michael: Bob Hartwig, thank you so much for joining us. It’s an honor and privilege to have you with us today. Thank you.

Robert: Well, very glad to be here, Michael. There’s a lot going on in this business today. I’m so happy to talk about some of those things with you.

Michael: In terms of an understanding of the industry as an industry, the big picture, frankly, I can’t think of really anybody in the world that I would rather talk to about it than you. Thank you for joining us. First thing I’m going to ask you is a brief thumbnail of who you are, what makes you tick and your career in the industry, because it’s been stellar.

Robert: Thank you very much. For the past two years, I’ve been a professor of Finance Risk Management and Insurance here at the University of South Carolina. I’m also the director of the Center for Risk and Uncertainty Management here. The first two years have been great, helping to mint the next generation of talent for the insurance industry and for the business community overall. I very much enjoyed it.

That came after a 23-year career in the private insurance sector. The last 10 years of which, I was President of the Insurance Information Institute, the large industry property cash trade association. I’ve had stints prior to that. That organization’s Chief Economist. Prior to that, at Swiss Re and also NCCI, where I in fact did actuarial work for about five years innovation.

Michael: You do know this industry. Can you give a very short thumbnail on what the institute is?

Robert: Yes, the Insurance Information Institute?

Michael: Yes.

Robert: Right. Where I worked for 18 years. 8 years as Chief Economist, then as its President. The institute is an industry trade association. At that time, we had a close to 70% of the industry as members at least as measured by premium volume. What we did is we effectively explained what insurance does and how it works to the world. That could take the form of appearing in the media, helping the average person understand insurance on a day-to-day basis, or in the wake of disasters or immediately before a disaster might occur.

There’s just so many experiences during that time. Everything from 9/11, to Katrina, to Sandy, to wildfires and events all around the world. Day-to-day advice, how to save money on auto insurance, home owner insurance, or properly insure your business. It was an extra ordinary time and an extraordinary job. I enjoyed it very much. Organization’s been around for about 60 years.

It’s a complicated industry. Many people don’t understand it. The industry has always felt there’s a need for a voice of the industry, and the insurance information to fill that role. Again, whether it was through the popular media or on up to testifying before a congressional committees.

Michael: When national media had a question about insurance, there were certainly a lot during your reign, they turned to Bob Hartwig a lot, didn’t they?

Robert: They did. I was very pleased to play that role. Effectively, the industry chief economist and chief spokesperson during my time there. I very much enjoyed that. I did a lot of writing during that period of time. I would be on the media. I would make close to 80 to 90 presentations around the world at company events, or association events, or conferences on the topic of insurance, or the financial markets situation around insurance of the legal and regulatory environment. Or again, sometimes in legal cases, or testimony before our Congress.

A wide variety of demands on my time forcing me to be a jack of all trades on all lines all across the US. That keeps you really, really busy.

Michael: I’m sure it did. The other day, I was looking at the agenda for the NAMIC Conference. I don’t know if it was their annual conference or their management conference. I noticed that there was an economy power session that was on the agenda and a tourist guide to what’s happening now and what’s on the horizon. The session will focus on trends, challenges and opportunities in the property casualty insurance industry. Our speaker will provide a comprehensive overview of the industry and give it insight on what has happened during the past year, as well as what might be in store for the year ahead.

When I saw that that was you as the speaker, I thought, “I’ve got to track Bob down again.” You were very, very gracious to give me an opportunity to pick your brain. It seemed to me, there’s really nobody better in the industry than you to talk about the trends and the state of the industry. Let’s start with that. If you were going to take a snapshot of how the industry is doing right now, what would that snapshot look like?

Robert: The industry is really a picture of strength. That’s a great thing to be able to lead off saying, is that this industry, which now exceeds $500 billion. In other words, half a trillion dollars annually in premiums written and is growing at about a 4% pace. Despite last year’s record catastrophe losses, the industry remained very strong, stable, sound, secure. That’s exactly what everyone wants to hear about the insurance industry.

Michael: If you don’t mind me interrupting. During your reign at the institute, would you always have been able to say that or were there times where you were more concerned about the strength of the industry?

Robert: During my time, 18 years at the Insurance Information Institute, I had the good fortune of being able to say that the industry was always financially strong, sound and secure. Of course, there were periods in time when there was somewhat less certainty about how long that might last. For example, at the time of 9/11, where it was very clear this was going to be an enormous loss, the likes of which we had never seen before, while I was confident that the industry could absorb losses in the tens of billions of dollars, and ultimately, it wound up being in today’s dollars, about $45 billion in loss. It’s the largest loss ever. The industry had never seen anything like that yet.

I was confident the industry could absorb it. It would be painful, but it could absorb it. I was concerned that, as we’re many people at that time, that this could be the first of several events, that we didn’t know if there were other attacks that were planned that could be equally as costly. Those could’ve proved challenging. Likewise, when Hurricane Katrina hit in 2005 along with a number of other storms, these produced, in today’s dollars, somewhere close to $75 billion in insured losses.

At that time, I was substantially more confident because it was easier to understand that risk, the risk of hurricanes. Eventually, hurricane season does mercifully come to an end as it did at that year. The industry had the opportunity to recharge its capital banks and adjust in terms of price. It’s around the underwriting changes that needed to be made.

Again, through out this nearly two decade span of time, there was never a time when I had to ring an alarm warning people that a large number of insurers we’re going to go bankrupt and their claims might go up unpaid. The message I was always able to deliver is that your claim is going to be paid, it’s going to be paid in a fair, timely and expeditious manner. If you’re someone who has to go on CNN and talk about being at the nation’s economic first responder, believe me, that’s the message you want to be able to deliver.

Michael: We started this conversation with your declaration of good news that the industry is strong. If we look below the surface of the water, what’s down there? What are some of the trends that might be happening in different lines, in different classes, in different regions?

Robert: It was at the backup one moment, that the industry has continued to suffer from low interest rates. It’s still the case that the industry generates less investment income than it did prior to the financial crisis. With investment income being the second largest source of revenue, this remains a stressor on the entire industry, one which it has not yet completely adjusted to.

Beyond that, if we drill down and we look at personal and commercial lines, it’s really a tale of two industries, almost. We have the industry roughly divided 50/50 in terms of premium, in terms of personal lines and commercial lines. The reality is, is that personal lines is seeing growth that is much stronger than commercial lines nowadays.

Michael: Why is that?

Robert: It’s not because the economy is affecting either side of the business deferentially. The economy is creating new exposures in terms of cars and homes for personal line insurers, business, property and liability exposures for commercial insurers. The difference is rate. We are seeing renewals in personal lines, both on the auto and home side, rate renewals are fairly strong nowadays. The strongest we’ve seen in personal auto in close to 15 years. Whereas on the commercial lines side of the business, until very recently, renewals were flat and even slightly down.

The most recent data suggest they’re very slightly up in commercial lines now. This may help the numbers out a little bit in 2018, but there is a growth gap, if you will, between personal lines and commercial lines with growth in the 6% to 6.5% range for total personal lines premiums versus maybe about 2% per commercial lines.

Michael: 6%, 6.5% is relatively high. Would you say we are in a hard market?

Robert: No. I think that what we’re looking at in personal lines are rational and reasonable. Price increases that are tied to everything from higher catastrophe losses on the homeowner side, to rising or sharply higher auto claim severities and lesser degree frequencies.

On the commercial lines side, we are seeing some flattening in the market because off fairly intensive, but still rational competition, and some improvement in key lines such as workers compensation, which has seen dramatic improvement in the underwriting performance. Hence, actually seeing a very favorable underlying claim frequency and severity trends in some cases. This is resulting in carriers simply rolling back rates in most states, because the underlying fundamentals are good.

That said, it is the case that in most commercial lines, until very recently, with the exception of commercial auto which is up sharply, most lines were either flat or decreasing.

Michael: Let me ask you an amateur’s question, which to some extent, I guess, it’s my job. I think you’d indicated that in autos, severity’s up and frequency is down. If I got that right, is frequency down because of technology and the severity up because of technology?

Robert: That’s definitely part of it. Severity has been up sharply. Frequency has been up very modestly. The severity, many people believe, is in part due to technology. Vehicles today are more expensive to repair, packed full of sensors and other kinds of electronic equipment that are rather expensive to replace. The labor costs are pretty severe because of the fact that it isn’t your average Joe Good wrench with a tool set who can repair these things nowadays. There’s a lot of diagnostic equipment and people who are trained in how to calibrate and fix these technological innovations of our vehicles.

Frequency is up a bit in part because the economy is recovering, people are driving more. Then, there’s a part of it that is difficult to disentangle, but we know it’s part of the story both on frequency and severity, and that is distracted driving. This is a problem. It exists in personal lines and commercial lines, but the data are scant. Obviously, people don’t admit to the fact they’re distracted driving. Very often, when it is the cause or the contributing cause, that’s oftentimes unknown or unreported.

Michael: Is there an industry best guess on how big of a problem that is?

Robert: There are some federal government statistics that suggests that of the 40 or so thousand highway deaths in the United States today, that approximately 10% of them are due to some form of distracted driving.

Michael: Not just smartphones?

Robert: Not just smartphones. This could be fiddling with your navigation unit. It could even be putting on lipstick.

Michael: Or your Big Mac.

Robert: Exactly. There is no question, however, that the distractions are more evident than ever while driving, particularly texting while driving, and particularly among youthful drivers.

Michael: All right. Some of the technologies that are designed to prevent accidents are trying to counterbalance the accidents caused by the other technologies that we’re holding in our hand.

Robert: Exactly. Were it not for distracted driving and handheld devices, it may be the case that frequency would be falling and maybe somewhat steeply. We simply don’t see that in the data today. Technology probably has some ways to go before it can effectively overcome the negative dimensions associated with distracted driving.

Michael: Back to what’s under the surface, are there regions of the country that are stronger in insurance and are there regions that might be suffering?

Robert: There are some areas certainly that have been harder or severely impacted by catastrophes last year. Obviously, Texas, parts of Florida, California with the wildfires. People have forgotten about this, but very severe hail events in places like Colorado. When you take a look at the damage on the ground, it is largely the Gulf Coast of Texas and the wildfire impacted areas of Florida. Of course, the Hurricane Maria impacted areas of the Caribbean including Puerto Rico.

Most people, unfortunately, don’t focus on that market so much. Despite the large-scale losses in all of these areas, Puerto Rico exempted, we don’t really see any disruptions in the market for property insurance or business interruption insurance. The cost might be arising modestly, maybe mid-single digits in some of these areas, whereas outside catastrophe prone areas, rates might be relatively flat on the commercial property and business interruption side.

No real problematic dislocation in terms of lack of availability or sharp spikes in coverage. That owes to the fact that the industry went into last year’s hurricane season and the catastrophe season overall in very strong shape with adequate capital. Actually continued to build capital through the end of the year despite the large-scale catastrophe losses. It’s also the case that reinsurance capital remains at record levels. There’s also significant participation by the catastrophe bond market as well, which is an additional source of capacity. All of this helps to essentially iron out some of the peaks and troughs that perhaps used to occur after major disasters.

Michael: That ironing out, is that something that you think we can anticipate in the future? You and I have been in the industry about the same amount of time, I think. During that time, we’ve seen some fairly steep and painful hard markets and some really long slow soft markets, has the industry gained intelligence, and, perhaps, tools to help it price insurance in a manner that’s going to flatten out some of those market swings?

Robert: There’s really three things that have really contributed to the flattening out what we would call the insurance cycle. Certainly, better modeling of risk is one of those. We have a better understanding of how much various types of disasters are likely to cost in various parts of the country. This translates into more rational pricing and more accurate capacities being purchased in terms of reinsurance programs for companies.

This makes for a smoother and more predictable pattern of losses for insurers and reinsurers alike. They’re generating a premium that is more adequate and with increased use of reinsurance or accessing the capital markets, this will wind up creating a smoothing of results over time. Interwove two of my first points. The other one, again, is pricing. Pricing today better reflects actual risk than it did, say, 15 or 20 years ago, or certainly 25 years ago with events like [unintelligible 00:27:36].

The third factor isn’t really all that obvious. It has to do with the low interest rate environment. The reason why low interest rates tend to flatten out the insurance pricing cycle is because, at one point, when interest rates were high, insurers had an incentive to essentially cut prices to generate as much cash flow as they possibly could as quickly as they could, then invest the money. Today, because of low interest rates, that incentive is diminished. Even though interest rates are ticking a little bit higher, this incentive for insurers to so called cash flow underwrite is nowhere near what it used to be, say in the ’70s through the ’90s.

Michael: It’s a little bit less obvious. It would seem that insurances, for want of a better word, it’s more right priced.

Robert: It’s more adequately priced.

Michael: Right. Very good. A lot of my listeners, Bob, are the principals of insurance agencies or people responsible for the distribution of insurance. What kinds of trends and changes do you see happening on the distribution side?

Robert: One of the great pleasures of my years at the Insurance Information Institute and also here in the academic world is my interaction with agents and brokers all over the country. I’ve spoken to many of the state agents and brokers’ associations. I have a number of them on my calendar right now [chuckle] coming up for the remainder of the year. As well also, the trade press.

There are groups that’s always looking to keep on top of the latest trends. In terms of the distribution side of things, obviously, if you are an independent agent or even if you are a captive agent, whether we’re talking about regional or local broker, everyone thinks about the trend moving from broker business or IA business over to direct. This has been a fear, really, for 20 years now when the first online sites began to appear in the late 1990s during the Dot-com Boom.

A lot has happened then. What we find now is, I think, that you look ahead and maybe discern what the ultimate model will look like. It’s going to be a model that focuses necessarily on the need and demands of consumers. What consumers want is a seamless and nearly effortless relationship with their insurer. What that means is that they’re going to want to be able to interact with their insurer, with the representative of the insurer, meaning the agent, who many individuals view as indistinguishable from the insurer even if it’s an independent agent. It is their representation of the insurer and it’s the only entity with which they will ever speak with or deal in many cases.

They want to be able to do that in person, they want to be able to do it by phone, they want to be able to do it online. Far from simply just rolling over and allowing the direct channel to– basically, you serve all their business, what you see now is agents and brokers, along with their carrier partners, have developed what I call sometimes as a channel fusion or an omni-channel approach. Basically, all these means is that you as a broker, you as the agent, have created a portal or technology that allows you to communicate with your agent or broker in a very simple, immediate, transparent fashion.

I think there are a lot of work behind the scenes in terms of assuring that agents and carriers all are operating off technology platforms that allows this to happen. Independent agents understand that they need the carriers to help them with this. The carriers and the agents are in this struggle for market share together. There’s certainly been some erosion when we look at, particularly, private passenger auto, and particularly, when we’re talking about minimum limits type of coverage. Can this thing be purchased online directly with no participation by an agent at all? Yes, that can occur.

At the same time, when you move beyond the highly-commoditized business that exists on the low average premium end of the spectrum, I think that there remain, both from the personal lines and the commercial lines space, plenty of opportunities for agents of every stride and brokers of every stride to demonstrate their value. If you think about it on the commercial lines side, you can talk about, for instance, new risks that can be insured again. Cyber coverage, for example. Now, it’s something that is not just for large businesses, it’s for small and medium-sized businesses.

It is incumbent on the agent or broker to make sure that they understand these products, understand the gaps and coverage that exists probably in the majority of the programs that they have in place with their commercial customer and explain the need for this type of coverage or the need to ensure that such things as floods, which are becoming increasingly common and severe are insured again. That coverage is available, that is affordable. How they can close all of those gaps.

The same thing on the personal lines side. After the difficult years of the great recession, what we begun to see is millennials coming out of their parents’ basements and getting jobs, buying vehicles, purchasing homes and so on. All of this is creating more and more demand for insurance products in general including products offered through independent agents and local brokers.

Michael: A few minutes ago, Bob, you said that the first online insurance was available about 20 years ago, which seems like it’s remarkable that it was that long ago. That was when dot-com was exploding. It was also about 20 years ago when Bill Gates declared the disintermediation of industries across the world. It sounds to me like you’re relatively bullish on the agency system, that you think that there is an ongoing role for the agent to play.

Robert: I’m bullish because I’ve seen the agency system and I’ve seen the independent agent companies not stand still, but adapt. We’ve seen that’s not just in insurance, but in other industries as well, such as banking, for example. Where there are all kinds of startups that have thought to create banks that exist virtually only. It is the case that the big banks out there, whether it’s Chase, or Citi, or Wells Fargo, has looked at this and come back with competitive products and services of their own. They’re not standing idly by. The same thing goes for insurers, brokers and agents. They’re not standing idly by.

Michael: Right. It wasn’t long ago, but I think preceded InsureTech that FinTech startups were attempting to disrupt banks, then banks embraced FinTech and really competed very successfully. Would you say that same trend is happening in insurance right now, that the early InsureTechs where kind of disruptive?

Robert: I have to draw a distinction here. Some of the InsureTechs that started off a few years ago, they had a pretty big PR budget. They claimed that they were going to disrupt the entire industry and found out that it’s actually a lot harder to be a purely online insurance company than they thought it would be. You do need significant insurance industry expertise in addition to the technology to make it work.

In fact, as it turns out, only about 4% of InsureTech startups in the PNC space are actually risk-bearing insurers. What has happened is rather than being usurpers and disruptors, what in fact is happening is InsureTech innovation is almost taking the form of a supermarket of R&D for the insurance industry.

Michael: Well said.

Robert: What it allows insurers to do and brokers as well, is to go out and shop in the InsureTech supermarket and look at solutions. Usually B2B, business-to-business type solutions that help them with processes related to the processing and payment of claims and perhaps expedite that. Data analytics is another big area right now. A lot of this day-to-day operational issues insurers deal with. Early days, most of the InsureTech startups actually came in and bought while they’ll find a better way to build the distribution mousetrap. They look at that big juicy 10%, 11% of all premiums paid that are associated with commissions and brokerage [crosstalk].

Michael: No doubt they were looking at that $500 billion you were talking about.

Robert: You multiply that times 10%, you can see that it’s about $50 billion a year that flows directly into the distribution channel. That looks pretty juicy and tempting stuff. That’s a trickier business than they thought if they want to integrate that with an actual insurer. Then, when you get down to it, as I mentioned, there had been online portals for the sales of insurance for 20 years. How do you build a better mousetrap here? Do you have a very cute looking graphical user interface or what have you?

That’s not really very innovative. It’s not what consumers are clamoring for right now. It’s not really where the money is. The margins are, after startup expense and so forth, they’re relatively thin. What we see is innovation in terms of analytics, innovation in terms of such things as claims processing. There can be some as I said, B2B that InsureTechs can develop on certainly on the sale side as well.

There’s discussion about such things as smart contracts whereby you have, for example, an individual files a claim along with the photographic documentation. There’s artificial intelligence application that would certify that the claim should be paid, what the amount should be, and then there is within seconds or minutes an electronic deposit made in the individual’s bank account. So there are solutions like that. There are also others that are looking to develop risk management solutions such as the creation of devices that would monitor such things real-time and continuously the presence of smoke or moisture or vibrations in a home, or similarly technologies and automobile. All of which would provide the owners of the homes with real-time information about risks but at the same time would provide insurers with real-time information useful for underwriting purpose.

Michael: All right. Bob, let’s take a look at what this new future might look like because it sounds like a lot of things we’ve talked about so far. A lot of things you’ve mentioned have been changes driven by some kind of technology. There are a lot of emerging technologies that are not necessarily designed to change, transform, or disrupt the insurance industry but by virtue of what they do they might do that. What do you think our future looks like with things like the Internet of Things or autonomous vehicles and blockchain let’s say, and so on and so forth?

Robert: It’s always been the case that the insurance industry has thrived through periods of large-scale technological change that aren’t necessarily associated with the industry directly. If I go back in history, I think about the Industrial Revolution or electrification of businesses in home, or I think about the invention of the automobile and the aircraft. All of these certainly displaced some types of insurance revenues.

For instance, when the automobile came online, that was very disruptive to insurers of horses and buggies. There’s no question about it, and in the same way that when transportation by rail became more common, that disrupt transportation by steamship, and likewise when as we moved into the era of aircraft, and so on. That has been a continuous theme throughout the history of the world of insurance.

Insurers have adapted smoothly to the new technological landscape, to the new economic landscape, that accompanied each one of these transformations. There have been demographic transformations, the explosion of the U.S. population after World War 2 and the baby boom generation, and millions and millions of homes and exposures being created. Insurance has adapted to all of these things, and I generally challenged this notion that the industry is one that’s kind of backwards and stodgy. If it were that backwards in stodgy, I don’t think it would have persevered in its current form for the better part of 350 years. As we move into this era of the Internet of Things and autonomous vehicles or commercialize spaceflight, I think that the industry will find opportunities to grow once again.

The Internet of Things is going to generate incalculable amount of data, for instance. That will allow insurers to provide coverage and to provide limits for certain types of risks that never that before couldn’t even be dreamed of. Or that would allow people to purchase insurance in real time or only the time that they’re using a particular product custom tailored to exactly where they are and how they drive or the type of vehicles are in and how long they’re there so that the price matches the risk more so than ever in the past.

I mentioned smart homes and monitoring devices. You have smart places of work and wearable devices that will help us understand how injuries occur and how to prevent them in the workplace. These are all areas that are already providing fruitful opportunities and areas for growth for insurers, not just providing pure insurance but also rich management services.

Michael: Some of these technologies are really designed to reduce risk, right?

Robert: They are but that has historically been the case. The workplaces have been getting safer for the better part of 75 years. Automobiles have been getting safer for the past half century, but that creates opportunities for insurers as well.

Michael: In spite of all of this, the insurance industry is growing faster than the economy, right?

Robert: It’s growing in some segments, close to what the economy is growing at across. The personal line space growing a little fast or commercial lines a little bit slower but it’s certainly keeping pace and its share of overall economic activity continues to remain of relatively robust and constant. There are more challenges on the life insurance side certainly than there are on the P&C side.

Michael: Let me ask you a question that is either on the mind of my listeners or should be. On one hand, it sounds like your overall your relatively bullish about the industry, and you’re pretty encouraging about the industry’s ability to innovate which I think is pretty refreshing. Now, if we go a little bit deeper and we start taking a look at sections or segments of the industry like the independent insurance agent, just like let’s say they’re not insuring the aviation industry mostly. They’re not insuring Boeing, okay. Do you think there are some trends that the industry will be able to respond to but the agent will be left out, of and how do you think the agent will fare in this future?

Robert: It’s hard to say at this point. The agent could at some point, for example, find themselves largely “left out” of lower end minimum dollar, minimum limit, highly commoditized types of transaction-

Michael: Fair enough and they tend not to be as nearly as profitable or lucrative for the agent.

Robert: Exactly, there’s a stronger incentive or because these coverages tend to be relatively standardized. There’s not a lot of profit in there. There is a lot of incentive to simply “commoditized” the product and sell it for as low price as possible probably online. It doesn’t mean that there isn’t a role on the back end for the insurer to help with a claims process when these in fact do occur.

You could see some commoditization on the lower end of the commercial market too, very simple commercial auto type programs and workers’ comp programs potentially. Yes, those could wind up in the realm off the plate of the average independent agent at some point in the future but that’s not where most of the growth is in the future.

Michael: Where do you see the growth in the future?

Robert: The growth is most likely in the middle part of the market and also to some extent at the high end of the market. On the personal line side, who actually has seen very strong growth among high networth customers. So this particular type of account has proven to be among the most profitable for the major carriers out there. It generates proportionately a lot of premium relative is a number of risks that are actually in that pool so making sure that the needs of your high networth customers are adequately met is a potential source of revenue and loyalty among these customers who many of whom didn’t start out wealthy.

They just simply worked hard over a span of many, many years, and they perhaps have multiple properties, vehicles, homes, even employees at home sometimes, but they may not be adequately insured that’s often the case. So that’s one area. Again, if the economy continues to grow, this is creating more and more exposures that are associated with the middle class whether it’s vehicle and whether it’s property, people beginning to have children, and was eventually again, wind up having drivers or creating new drivers of the future. I think that for pure property casualty insurers within your agency, your brokerage having some expertise that can help on the life, health, and wealth management side of the business, is something that could be useful in terms of retention of business. Because as we move through time, one thing that is going to become far more complicated for the average individual, even sophisticated individuals, is nearer when you’re responsible for most of your own retirement savings.

That means the you need to accumulate assets, and some of them are going to be physical, some are going to be financial. How do you ensure that you and your family have a secure retirement? That does require some skills involving familiarity with appropriate investment products and life insurance products.

Michael: Got it. All right. Quick question. You’d mentioned that they’re more challenges on the life side than the P&C side. How would you summarize that?

Robert: I think that the life insurers have suffered from an operational standpoint of from low interest rates. That has technically hurt them. It’s hurt them in terms of what they can generate off the premium they generate. It also hurts them in terms of the interest rate guarantees are now lower than they had once been on a variety of insurance products. In fact, some have had eliminated that altogether.

Long-term care products have been very difficult for life insurers. Many have even gotten out of the business all together. They’ve lost so much money. The other thing is that if you look at individuals out there today, in their prime working age, many have foregone the purchase of life insurance for a couple of reasons, because many people have deferred marriage and deferred childbearing and are having fewer children. Those would be some demographic reasons behind this. They’ve deferred purchasing a home so therefore– Or if they rent, they don’t have a mortgage, which would be a primary reason to effect purchase life insurance.

These have created some challenges for life insurers into a variety of life insurance products. If you just move slightly over to the health insurance area, now, this is really the wild wild west over the last eight or nine years with the Affordable Care Act. Many brokerages that have a benefit group or division within them have found this to be one of the most profitable division.

Michael: Also true in a lot of insurance agencies.

Robert: Yes. Exactly. That’s because most businesses while they might feel they can almost do it themselves and understand what they’re doing with respect to many of their coverages, I think they throw up their hands when it comes to health coverage.

It’s very difficult to find consistently affordable quality healthcare for your employees. Disability coverage as well is somewhat easier. Nevertheless, this market requires the expertise of individuals who truly understand all that is changing in this marketplace, and 2018, 2019 are going to be no different where we could expect major changes in health insurance programs overall.

Michael: Expect it to keep changing. All right. Bob, I have two final questions for you. One, I’ll phrase it; it’s a little bit ridiculous but let’s say Bob Hartwig wakes up in the morning with all of the knowledge that you’ve covered about this insurance industry as a whole, and you wake up as an independent insurance agent. All right.

Now, you’ve got this knowledge of the trends and the forces and the changes and some reasonable predictions about what might happen in the future. How would you respond strategically as an agent based on what you know now?

Robert: As an independent agent, I want to make sure that my appointments are with companies that value technology in the following way. As I described earlier, that I want them to be my partner and helping me communicate seamlessly 24/7, 365 with my customers.

I believe firmly that while insurance is a product that is used infrequently and quite frankly, hopefully never. That doesn’t mean that you have to be out of sight, out of mind, when it comes to your customers. You don’t want the only interaction with your customer to be what might be [crosstalk] of life.

Michael: It’s time for your renewal. [laughs]

Robert: Yes. When they have a renewal and they’re writing a big check or when they’ve got a

[crosstalk]

Michael: Yes. Okay. Hey, what you’re saying by the way is music to my ears and our listeners have heard that from me. I’m thrilled that they’re hearing it from you.

Robert: Yes. There are increasingly technological opportunity. For instance, in the future there can be products available, say in the homeowners, in the auto space, as well as maybe small commercial, where all policyholders could have an app that provides them with a dashboard easily access, that not only gives them access to all of their policy information, but also eventually gives them real-time feedback on how they’re doing from a risk perspective-

Michael: Right. Lovely.

Robert: -in assessment of how you’re driving, in assessment of how safe your home, or your business is. This gives you an opportunity to actually give the insured an opportunity to interact with you in a way that that can create a very positive feedback loop. Understanding that, well, if I try to reduce how often I speed, I can benefit from that.

If I try to make sure that my sprinkler system is more regularly serviced, then I can reduce my commercial property insurance premium or business interruption premium. These sorts of things are already beginning to come online.

Michael: That’s a seeable future, isn’t it?

Robert: This is not Buck Roger’s, Star Wars sort of things. Some of this is reality today, and could be certainly more ubiquitous within the next 10 years. Those are the companies I want to partner with and that gives me an opportunity to provide what I would call high-touch interactions with my customers.

Michael: That’s very exciting. Okay, my final question. Bob, you are an economist, so I’ll ask you what everybody wants to know. I appreciate the fact that nobody has a crystal ball, and making predictions is always makes fools out of most of us. Overall, we are affected and agents are affected by how well the economy is doing, how well their local community is doing. What do you think, how is our economy?

Robert: Judging by the economic statistics that are currently out there, such as the unemployment 3.8%, lower than it’s been in 18 years. It’s hard to get better than that. Most people only see an unemployment rate that low maybe two, three times in their entire life.

Michael: Indeed.

Robert: GDP, the economy is growing by close to a 3% clip nowadays. That’s in the second quarter of this year, that’s relatively robust. At the same time, I do think people do pick up on the potential uncertainties associated with rhetoric about trade, for instance, and that’s being registered a little bit in some of the consumer and business confidence indices that have come out very recently. It’s perhaps the case that this, too, shall pass.

It’s very difficult to predict exactly in the current political environment where we’re going to wind up six months down the road. We have midterm elections coming up. Generally speaking, when we look at what drives the economy, it is the consumer and it is businesses that account for most of GDP. Consumer confidence is at or near about 18-year high and the same thing for businesses. So underpinning everything.

Michael: Let me ask you a question. Is that also true, and this is again an amateur’s question, is that true, generally also a year or two before the onset of a recession, do people feel confident until they don’t?

Robert: Typically, yes.

Michael: I was just wondering, how much does consumer confidence really predict the future?

Robert: If consumer confidence takes a plunge and business confidence takes a plunge with it, then that’s likely to result in a-

Michael: That’s a predictor.

Robert: -economic activity.

Michael: Yes. Okay. That’s a pre-

Robert: [crosstalk] but it could mean a deceleration in growth. As an economist, I do worry about killing the goose or injuring the goose that laid the golden eggs here still with self-inflicted wounds. We’ll see how the election plays out here. It’s difficult to discern whether the president’s playing hardball or is posturing right now with our trade partners. We are a very much an open and global economy-

Michael: Indeed.

[crosstalk]

Robert: -and-

Michael: Right.

[crosstalk]

Robert: -billions of people’s jobs depend on international trade.

Michael: Yes. All right. Bob, I am thrilled that I was able to circle back again with you and I am very grateful that you took time out of your busy schedule to share some time with us.

Robert: My pleasure. Anytime.