Debating industry issues By Phil Zinkewicz
Prospects for the property and casualty insurance business, at least in the near future, are promising, according to a panel of industry analysts, sponsored jointly by several insurance industry groups and brought together by the Insurance Information Institute (I.I.I.) at its annual industry forum recently held in New York. However, they also said that the industry faces serious challenges in terms of maintaining proper pricing and dealing with natural catastrophes.
Two panel discussions made up the one-day I.I.I. forum. The first was titled “View From the Outside Looking In,” and panelists included: Vincent J. Dowling, Jr., managing partner of Dowling & Partners Securities L.L.C, a stock brokerage firm specializing in property and casualty insurance stocks; Brian P. Sullivan, a journalist who has been covering the property and casualty insurance industry for 25 years and who is editor and publisher of two newsletters covering personal lines; David Schiff, founder, editor and writer of Schiff’s Insurance Observer; and Mark Puccia, a managing director in insurance ratings for Standard & Poor’s. The panel was moderated by Frank Nutter, president of the Reinsurance Association of America. Nutter set the stage by referring to the P-C industry’s performance during 2005, noting that the industry did well despite the devastating hurricane season. He said that the property and casualty stocks outperformed the S&P 500 by 10% and that rates would hold firm in 2006 with average rises of about 6%, calling that a “mini-hard market.” He said also that, while most projections for 2006 say that the industry will have another good year, some are speculating that the P-C industry might return to the cyclicality of the past. Sullivan said that insurers have become “smarter” in recent years about pricing their products and that 2005 was a year of “let’s not do anything,” meaning that the first half of 2005 was extremely profitable but that the hurricane season was approaching in the spring so insurers did not compete aggressively. He said there’s no reason to suspect that this approach would change during 2006 or beyond unless the industry “does something stupid,” which he said has often happened in the past. He was referring, of course, to years past when insurers competed fiercely for premium dollars for investment gains. Schiff said that insurers should enjoy its good years, but not “get intoxicated.” He said that sooner or later, some insurers would start cutting prices to bring in new premium dollars and that would bring on a soft market all over again.
Dowling said that the P-C industry is “over-earning” and that “something is wrong there.” He predicted that there will be more consolidations in the business in the future. Puccia agreed with Sullivan in that the insurance industry sometimes “does stupid things.” He noted that, even with Hurricane Katrina, the industry made money, but that can’t keep happening. “The industry has more information than ever before, so right now things are good, but it won’t last,” he said. Nutter referred to a recent Conning study, which said that the major personal lines players—Allstate, State Farm, Progressive and Geico—will, in time, drive smaller insurers out of the business, but Dowling countered: “Nobody is going to get out of the business with the profits the industry is making.” All the panelists agreed that the problem of worsening hurricanes in Florida and the Gulf area is one that the industry is going to have to recognize. Sullivan said: “I think that the insurance industry should put together some sort of think tank right away to prepare for that big event, whatever it will be, that could threaten the industry’s financial stability. Why wait until the event occurs and then struggle to find a solution?” The second CEO panel included Edward M. Liddy, chairman and CEO of Allstate; Ronald R. Pressman, president and CEO of GE Insurance; Frederick H. Eppinger, president and CEO of The Hanover Insurance Group; W.G. Jurgensen, CEO of Nationwide; Edward B. Rust, Jr., chairman and CEO of State Farm Mutual; and Brian O’Hara, president and CEO of XL Insurance (Bermuda) Ltd. The panelists agreed that regulatory constraints keep rates artificially low and encourage development in high-risk areas such as Florida. That, in effect, forces home owners and taxpayers to subsidize wealthy owners of waterfront properties, the panelists said. “People are willing to pay high prices for homes in coastal areas but are not willing to pay the real cost of insuring them,” said Jurgensen. “Florida is a one of a kind, a geographical anomaly. If the state is going to continue to attract new residents, it will have to make them pay for the view. You can’t ask those living in low-risk areas to subsidize West Palm Beach.” Eppinger said that insurers have had decades of profits wiped out by Hurricane Katrina and are pulling back from writing insurance in high-risk locations. “Into this supply breach have stepped under-capitalized, start-up companies, many of which could become insolvent in the event of a mega disaster. Meanwhile, the cheap rates they offer drive responsible, established carriers out of the market.” Liddy said the 2005 hurricane season has raised awareness of the need for a plan to deal with mega-catastrophes. “The solution is a private program sponsored by the government under which rates for home owners would be actuarially sound,” he said. “States would create pools funded by all entities that benefit from a robust local economy such as the banking and real estate sectors. The key is to pre-fund the cost of reconstruction after a catastrophe.” Liddy called for a federal program to back up the pools in early years, before adequate funds can be accumulated. However, O’Hara said he was wary of getting the federal government involved. “Ratemaking controls at the state level prevent the real costs from being included in premiums. True free markets would go a long way to solving the problem of funding catastrophes,” he said. The CEOs also talked about the emotional toll the 2005 hurricane season took on their teams of claims adjusters, calling them “heroes.” They described how some adjusters had lost everything they had to the storm but worked 24/7 to settle their neighbors’ claims. Rust said that new technology helped his company provide policyholders with better services. “Satellite imagery now allows us to quickly identify damaged properties so that we can issue checks to policy-holders even before we’ve had a chance to visit their homes,” said Rust. The CEOs voiced concern about the number of underinsured and uninsured homes and businesses in the Gulf states, a problem which is at the root of legal challenges regarding insurance contracts. There was general agreement that litigants would not prevail. “This goes to the heart of the sanctity of contract law in the U.S.,” said Pressman. On the wind versus flood issue, Pressman called for educating consumers on the importance of adequate coverage and urged the industry to “think about this educational effort as a long-term investment.” * |
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