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Panel assesses P-C market changes Catastrophes, rating models, tax codes and new capital are topics of discussion By Phil Zinkewicz Natural and man-made catastrophes, rating models for catastrophe exposures, U.S. tax codes that might be forcing U.S. insurers into offshore arenas, and new capital coming into the property and casualty insurance business were just some of the topics of discussion and debate at last November’s Eighteenth Annual Executive Conference for the Property/Casualty Industry held by The Conference Group, Ltd. Titled “Managing Change in the Property/Casualty Industry,” the event was sponsored by Ernst & Young’s Global Insurance Centre. Leading insurance company CEOs, regulators and other industry representatives were on hand to discuss the issues before the audience of 200. Deborah Slott, managing director of The Conference Group, said by way of introduction: “After several tumultuous years in the insurance industry, many people wonder whether the business has changed permanently. The continuous spate of headlines in the national press has attracted public attention at a level not seen in decades. At the same time, there are numerous issues within the trade that don’t have a high public profile but may be just as profound for the industry.” Catastrophe management A panel titled “Catastrophe Management—Current Initiatives and Future Courses of Action” consisted of Jose Montemayor, former commissioner of insurance for Texas and currently a principal with Black Diamond Capital Partners, as moderator; Thomas J. Wilson, president and COO, The Allstate Corp.; Hemant H. Shah, president and CEO, Risk Management Solutions; Terry Lisotta, CEO, Louisiana Citizens Property Insurance Corporation; and Keith M. Buckley, group managing director, Fitch Ratings. Wilson began by pointing out that the United States experienced seven of the world’s worst hurricanes within a 14-month period between 2004 and 2005. History has shown that the property and casualty insurance industry has had a good track record in dealing with natural disasters, he said. He referred to the Northridge, California, earthquake of 1994, where the industry paid out some $16 billion in claims and Hurricane Andrew as two examples of how the industry has acquitted itself well. However, he added that the industry is facing greater risks than ever from events of a catastrophic nature. “Roughly 60% of the U.S. population is in harm’s way,” he said, “from hurricanes, earthquakes, tornadoes and other potential disasters. A repeat of the San Francisco earthquake of 1906 would be devastating. A Category 3 or 4 hurricane in New York would cost about $200 billion.” As insurers, regulators and legislators grapple with programs to mitigate the risks, Wilson said there is no one solution. “There are inconsistencies in building codes that need to be addressed, a lack of education on the part of the public as to proper preparation for hurricanes. There is a role for the federal government,” he said, “although it should not be a complete takeover of catastrophe insurance.” Wilson said there is a role for the private insurance sector as well, but that role hinges on appropriate pricing. He said that pricing freedom in Florida in the last couple of years is what has kept insurance alive in the state. “Again, complete pricing freedom is not attainable and maybe not even desirable, but some pricing freedom should be allowed,” he said. Wilson concluded: “Catastrophe exposures are the most critical issue facing the insurance industry today. Without looking for one solution, but rather considering all aspects of the problem—building codes, a role for the federal government, a role for the private sector and pricing flexibility—we can win.” In discussing the residual market he heads, called Louisiana Citizens Property Insurance Corporation, Lissota said, “We had a disaster plan in place in 2004. We were ready for Katrina and when Katrina hit, everything in our plan worked just the way it was intended to work. However,” he joked, “we thought we were going on a three-hour cruise,” referring to the 1960s television show “Gilligan’s Island.” “We are still endeavoring to work ourselves free,” said Lissota. “But we’ve been dealing with threats of violence, bomb threats and even threats to kidnap our employees. We (New Orleans) were a community of artists and artisans. Now we’re losing our middle class. Will our community come back? Frankly, I don’t know,” he said. Lissota said that Citizens has been working with legislators, regulators, insurance companies and the GAO to find ways to minimize this kind of disaster. “Our office in Baton Rouge is set up for six people. We’ve had as many as 48 people in that office since Katrina. One of the problems we’ve had is keeping track of people as they’ve moved around since the hurricanes in 2005. Initially, people stayed with relatives immediately after the disaster and we had that mailing address, but since then they have moved to other spots and we don’t know how to get in touch with them to get them their checks.” Leadership challenges Another panel, titled “How Can CEOs Lead and Manage in an Increasingly Complex Environment?” consisted of William R. Berkley, chairman and CEO of W.R. Berkley Corp.; Joseph Brown, executive chairman of MBIA, Inc., and chairman of Safeco Corp.; Daniel R. Carmichael, president and CEO, Ohio Casualty Corp.; Peter R. Porrino, global director of Insurance Industry Services, Ernst & Young; and Vincent J. Dowling, managing partner, Dowling & Partners Securities LLC. Competition in the property and casualty insurance marketplace was a key topic of discussion during this panel. Participants agreed that changes in the U.S. tax law as they pertain to insurers are essential if there is to be a fair level of competition. Berkley said that current tax laws might drive the smaller, regional insurers out of business and larger insurers might be forced to move to offshore areas such as Bermuda because of those same tax laws. Berkley said that in 2005 his firm paid $260 million in taxes, while a Bermuda colleague paid $19 million. “That is not an insignificant difference,” said Berkley. “We’re still very profitable, so we can’t really cry poverty. I’m willing to pay my taxes, but my goal for 2007 is to see those guys (in offshore areas) pay the same taxes,” he said, drawing laughter from the audience. Other panelists agreed with Berkley, saying that Bermuda companies with low tax liabilities are competing with U.S. companies for American business. Another issue discussed was finding ways to establish new rating models in commercial lines. Berkley said that, through the vast stores of data in their computers, insurers have been able to identify all rating variables, but the trick is to be able to discriminate under the present regulatory environment. He told the audience of a conversation he had with an executive of a company that specialized in writing mobile homes. The executive said he could tell whether a mobile home was a good risk by whether it had real grass growing in front of the home. “The fact that the mobile home had real grass growing in front said something about the character of the owner.” This led to a discussion about the insurance industry’s current fight to use credit scoring in the rate-making process. The use of credit scoring is being challenged in various states around the country. Panelists applauded a recent development in Oregon where Measure 42, which would have prevented insurers from using credit scoring, was defeated. Other issues discussed during the Conference Group’s day-and-a-half meeting included the impact of the November 2006 elections on the insurance industry, capital manage-ment and economic capital modeling, and state legislative developments. * |
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