Industry forecast
Experts weigh in on issues facing independent agents
By Phil Zinkewicz
January 2008 began with the 12th annual Property/Casualty Joint Industry Forum, sponsored by the Insurance Information Institute (I.I.I.) as well as a broad base of other insurance industry interests. As usual, the forum consisted of two panels—one comprising insurance industry observers and the other, insurance industry representatives.
In addition, each year during the forum, the I.I.I. conducts an informal survey of attendees, encouraging them to answer a brief questionnaire to elicit their views on what to expect in the coming year. This year’s responses to the survey, from 236 attendees, were interesting to say the least.
First, the attendees were asked if they expected an improvement in profitability in 2008 in personal auto, homeowners, workers comp and commercial lines (excluding workers comp). Twenty-four percent said they did expect an improvement in personal auto, while 76% responded in the negative. Similar differences were seen in the other lines. In homeowners, 24% said yes, while 76% said no; in workers comp, 22% responded in the affirmative, while 78% said no; and, in commercial lines, 20% said yes, while 80% answered no.
When asked whether Congress this year will approve national catastrophe insurance legislation, only a meager 10% said yes, while the rest said no. Asked if an optional charter will gain momentum in 2008, only 30% responded in the affirmative.
On a more positive note, the attendees were also asked whether insurers were generally successful in wind vs. water litigation, and 82% said yes. Another question involved further consolidation in the P-C industry, and 80% said there would be.
In response to other questions, the attendees said that tort trends in 2008 will improve (6%), deteriorate (28%) or remain the same (66%); 46% expected an up year for the equity markets; 54% said they did not. Asked whether interest rates will rise, the split was 16% saying yes, 56% saying no and 28% saying they would remain flat.
Finally, in the most interesting question of the survey, the respondents were asked: “Who will win the White House in 2008?” The answers were 72% for the Democrats and 28% for the Republicans.
Catastrophe response report card
The first panel discussion offered at the forum consisted of insurance regulators, and included: Sandy Praeger, Kansas insurance commissioner; James J. Donelon, Louisiana insurance commissioner; Nonnie Burnes, Massachusetts insurance commissioner; and Scott H. Richardson, South Carolina director of insurance. David A. Sampson, president and CEO of the Property Casualty Insurers Association of America (PCI), moderated.
The insurance regulators spent a good deal of time talking about how the insurance industry has responded to recent catastrophes, and their reviews were positive. “Though it is not well-known, we’re a boom state, economically,” said Louisiana Commissioner Donelon. He said the influx of billions in claims dollars paid following Hurricane Katrina in 2005 laid the groundwork for the state’s ongoing economic recovery. He added that most of the financial resources for all of the economic activity resulted from the payout in Louisiana of $24 billion in private sector insurance claims. The federal government’s National Flood Insurance Program (NFIP) issued another $16 billion to Louisiana policyholders, he said.
“Ninety-eight percent of the claims were paid,” said South Carolina Insurance Director Richardson, referring to Hurricane Katrina. “The claims got paid, and we have sat for two years and listened to complaints about the minute amount of claims that didn’t get handled right. We’ve just taken it on the chin, sort of quietly, and haven’t said anything about it.”
Kansas Insurance Commissioner Praeger joined the chorus, citing two natural disasters that hit Kansas in 2007. She praised the insurance industry’s response to the first one, a severe tornado that hit Greensburg in May of last year. But the second disaster, which occurred because of heavy rains, posed a different dilemma because most of the damage came from heavy flooding, and few Kansas homeowners and businesses in the affected areas had NFIP policies.
“Many people don’t understand that their homeowners insurance policies don’t provide flood coverage, no matter how much we try to educate them to that fact,” she said.
Commissioner Richardson pointed to the U.S. House of Representatives’ vote last year to create NFIP policies that would cover policyholders for both flood and wind-related damages. “I am shocked,” he said, “that anyone would want to do anything with the federal flood insurance program without fixing it first,” referring to the NFIP’s perilous financial condition and complaints about its flood maps.
Praeger, who said she favors a move to an all-perils homeowners policy, also expressed skepticism about whether an NFIP policy that covered a policyholder for both flood and wind damage would resolve all potential disaster disputes.
“If you put wind into the flood insurance program, what about earthquakes? Was the house damaged by the earthquake, or did the fire occur first, because a fire is a frequent peril, which accompanies an earthquake,” she said.
Moving to the subject of auto insurance, Massachusetts Commissioner Burnes said this is a problem that plagues her state’s insurance markets. “It has been all auto, all the time,” she said. Commissioner Burnes talked about her successful efforts last year to encourage greater competition in Massachusetts’ highly regulated auto insurance market. “For now, auto insurers in Massachusetts will benefit from less government bureaucracy, but will not be able to use credit-based insurance scores to rate prospective auto policyholders.” She did say, however, that “I am going to go back and revisit it (credit-based insurance scoring) because it is clearly correlated to risk.”
Baby steps
The second panel at the forum included: Evan G. Greenberg, chairman, president and CEO, ACE Limited; Thomas J. Wilson, president and CEO, The Allstate Corporation; Ramani Ayer, chairman and CEO, The Hartford; Anthony J. Kuczinski, CEO Munich Re America; and Gerald P. Schmidt, president and CEO, Mutual of Enumclaw. Moderator of the panel was Frank Nutter, president, Reinsurance Association of America.
Basically, panelists warned that the industry should put its recent profitable years into perspective. “2007 is a terrific year following on 2006,” said Ayer. But, he said, “You really are looking at two good years, after a period of anemic years, It’s not like the industry has returned to its shareholders at outstanding levels over a sustained period of time. To look at two good years and start to pat ourselves on the back and say we have done a terrific job as an industry is a sentiment that probably our shareholders wouldn’t agree with. We need longer, extended periods of profitability,” he said.
CEO panelists agreed that they expect 2008 to be another profitable underwriting year, barring major catastrophes, but not necessarily across all lines of business. “It depends on where you play,” said Kuczinski. “Certain lines will perform better than others, but it is not across the board like it was a few years ago.”
Focusing on personal lines, Wilson said, “It’s not all about price.” Rather, he said, “In the auto business, people have been investing in product, technology, marketing and service. This raises the value of the product to the consumer and, in our experience, the consumer is prepared to pay for that.”