Critical Issue Report

Insurer panel lauds industry's stability

Challenges include Main Street business worries, reduced access to capital

By Phil Zinkewicz

The changing political environment and the current economic crisis are certainly uppermost in the minds of property and casualty insurance executives and brokers these days. Moreover, the natural catastrophes of 2008 are being discussed in industry circles as well.

In January 2009, the Insurance Information Institute (I.I.I.) hosted its 13th annual industry forum and, as is its custom, presented a panel of insurance company CEOs to share their views on industry challenges. A couple of weeks later, the Council of Insurance Agents and Brokers (CIAB), on the eve of its annual Legislative Leadership Summit, held a teleconference on the very same subjects, offering the broker’s view.

“We had a double whammy in 2008,” said Charles (Chuck) Kavitsky, chairman, president and CEO, Allianz of America Corporation. “Between the catastrophe issues that we had to deal with as well as what was happening in the financial markets, we had a pretty significant test and the industry did great,” he said.

Moderated by Dr. Robert P. Hartwig, president, I.I.I., the session offered insights into the way insurance company CEOs view the operational issues and challenges facing the P-C industry in 2009 and beyond.

Pierre L. Ozendo, CEO-Americas Division, Swiss Re, noted that the P-C industry is resilient because it is conservative in its risk management and because it is focused on a strong business model. “This industry is focused on a business model that has been proven over hundreds of years and continues to be proven today. Maybe we shouldn’t dabble in things we don’t know very well, but we do know our business model very well,” he said.

Michael S. McGavick, CEO, XL Capital Ltd., agreed. “The business model of the P-C industry remains strong, vital and proven yet again.” However, he cautioned underwriters not to let their eyes wander from that model.

“We’re the survivors or beneficiaries because we spend every moment focusing on the worst that can happen. Whenever we don’t start from there, we put ourselves at risk of experiencing a negative outcome,” he said.

Franklin (Tad) Montross, chairman and CEO, General Re Corporation, said there were a number of lessons to be learned from the financial crisis. “First the industry needs to reassess its reliance on catastrophe models. It’s certainly an area where there’s a dependency that we really need to understand.”

Another is that diversification is not a strategy in and of itself, according to Montross. “Diversifica-tion is a byproduct, and the operation risk associated with diversifying portfolios is much greater than the diversification benefit,” he said.

Speaking from the perspective of insurance buyers, Daniel S. Glaser, chairman and CEO, Marsh, Inc., noted that clients more than ever want to see options during the insurance selection process. “The majority of clients are seeking alternatives,” he said.

John T. Hill II, president and COO, Magna Carta Companies, said that the view from Main Street is that the overall downturn in the economy will hit companies hard. “The biggest concern that will affect Main Street insurers is that we’re going to be faced with a greater number of companies contracting or going out of business,” he said.

The CEO panelists said one challenge facing the industry in 2009 is that the cost of capital is rising. At the same time, the capital markets are practically closed, making the cost of raising capital prohibitive.

“Costs are going up but it is a precious commodity,” said Ozendo. “The return has to be assured; otherwise, we run the risk of putting shareholders and our future at risk.”

Kavitsky added: “Even though our capital position as a company is very strong, no one has excess capital to play with unless you are committed to doing something with it.”

Participants in the CIAB teleconference addressed property and casualty market conditions and the insurance regulatory environment. Ken Crerar, council president, first introduced Markham R. McKnight, chairman of the Council and president of BancorpSouth Insurance Services, who said that the commercial insurance industry is being strained because of the soft market and the economic situation. He said that the drops in insurance rates are leveling off, however, and the industry could see a hardening of the market by year’s end, if not sooner.

On the regulatory front, McKnight said that, after dealing with the financial crisis, President Obama will probably address insurance industry reform. Moreover, he said, because of the AIG situation, insurance holding companies will not be exempt from regulatory reform. He also said that the CIAB supports an optional charter for insurance regulation.

Andrew G. Cassidy, chairman of the Council’s Government Affairs Committee and executive vice president of Early, Cassidy & Schilling, said that last year’s CIAB efforts to bring about surplus lines reform were not successful because, although it passed in the House, it got bogged down in the Senate. He said he expects the reform act to be introduced again this year and said the Council is hopeful it will be passed in both the House and the Senate. “Capital access is difficult right now,” he said, “and any reform that will streamline the industry’s operations will be good for capital access.”

Christopher J. Nadeau, chairman of the Council of Employee Benefits Executives (a part of the CIAB) and principal of William Gallagher Associates, said that there will be a big push for health care reform this year. He said that President Obama’s program for health care reform is too focused on coverage availability and not enough on cost control. He said that there are 46 million Americans, including children, who have no health insurance. Two things that are needed to control health care costs are health care retirement accounts and wellness programs, he said. However, most important is an overhaul of the tort liability system, said Nadeau.

Finally, in the question and answer portion of the teleconference, one caller asked how optimistic the Council is that the surplus lines reform bill will pass Congress this session. Joel Wood, senior vice president of government affairs for the Council, said: “We are optimistic. We’re strengthening our political legs and we think we’re in pretty good shape in the House. However, it should be remembered that Congress will be dealing with other insurance regulatory reform issues. Surplus lines reform could become part of a broader regulatory overhaul. Surplus lines reform is a top priority for the Council and we’ll take it any way we can get it.”