Not business as usual

Economic turmoil dominates discussions at S&P conference

By Phil Zinkewicz

This past June, Standard & Poor’s hosted its 25th annual Insurance Conference at the Marriott Hotel—not in Manhattan but at the newer one at the foot of the Brooklyn Bridge in an area known as Brooklyn Heights. If the venue was a major departure from previous annual conferences held by S&P, the theme of the meeting was even more so.

In previous years, speakers were concerned about developments in the industry that pertained to the cyclicality of the business of insurance. Was the property and casualty marketplace hard or soft? What developments were in the offing that could change the cycle? Were there major catastrophes in the previous year and, if so, to what extent would they affect rates? Would state regulation be replaced by federal regulation?

But this year, the theme at the CEO forum was “Navigating Through the Financial Turbulence” as speakers discussed current economic conditions and how they affect the property and casualty industry.

Welcoming the attendees, Grace Osborne, S&P managing director and North American head of Insurance Ratings, said that the industry is in the midst of the longest recession since the 1930s. “The economic stress has stretched across the globe and is challenging the property and casualty industry,” she said, adding that the scheduled sessions would address that situation in great detail. Osborne also said that S&P analysts have met with more than 150 investment officers in corporations around the world to elicit their views on how to make capital markets more efficient and resilient.

As for goals, Osborne said that S&P is reviewing its economic capital model, working to determine incremental capital stress factors within companies being rated, providing S&P analysts with the tools to examine earnings volatility, and working to increase transparency in the rating process. “Transparency is necessary to build greater credibility in the rating process,” she said.

Next, a panel of insurance company leaders discussed how the dislocation of the credit markets and the uncertain economic environment has had an impact on the property and casualty insurance sector. Moderated by Thomas Upton, managing director of Standard & Poor’s, the panel included: Jay S. Fishman, chairman/CEO of Travelers; Evan G. Greenberg, chairman, president and CEO of ACE Limited; and Constantine Iordanou, president/CEO of Arch Capital Group Ltd.

Upton led off the discussion by pointing out that at last year’s S&P conference, panelists discussed the prolonged soft market and wondered whether or not that market would require “special events” to turn it around. He said the first special events to occur were Hurricanes Gustav and Ike, but they took a back seat to the economic problems that surfaced at mid-year. He asked panelists if the financial woes the country is exper­iencing have had an effect on rates.

Greenberg said that there has been a moderating impact on pricing, implying that rate decreases have leveled off a bit. However, he said, corporate capital remains adequate. “Therefore, rates have not begun to firm up as some may have hoped although there has been some firming,” he said.

Iordanou agreed, saying that CAT bonds are falling off and sidecars have all but disappeared, so capacity is down. Echoing Greenberg, he said that whatever firming there is in the marketplace is in the form of a falling off of rate decreases.

Greenberg also said that business is suffering because of the financial situation. “Companies are trying to save money in this economic environment, so they are taking higher deductibles or, in some cases, self-insuring. That means less premium growth in the industry.”

Fishman said that the economic situation is so volatile that it has become impossible to make six-month predictions. He said that insurance companies are allocating capital right down to individual lines.

Agreeing, Greenberg added that the cost of capital is increasing and that inflation is “going to be a part of the landscape in the future.”

Upton asked the panelists if reserve adequacy is a problem in today’s market. Iordanou said that some companies are better reserved than others, but that writers of D&O and E&O might experience reserve problems. Fishman said, however, that even in the more volatile lines, he doesn’t see reserve inadequacy.

“There’s a good deal of data available in the workers comp area, so that’s easy to analyze,” he said. “There is the perception that D&O will produce enormous losses for insurers,” he said, “but large institutions take very high deductibles in this line, so losses might not be that great.”

M&A activity and federal regulation

Turning to merger and acquisition activity, Upton asked the panelists if they see an increase in today’s market. Fishman said that the number of consolidations that are taking place right now is not dramatic but that M&A activity will continue. “Over the longer term, the trend is going to be toward organic consolidation,” he said.

Iordanou agreed, saying that with mergers and acquisitions there is always the problem of merging two sometimes different cultures. “So, many companies are going to aim towards organic consolidations,” he said.

Finally, Upton turned towards the future of regulation of the insurance industry, the perennial questions being will there be some form of federal oversight of the insurance industry and to what extent.

Fishman said that, eventually, there will be a move towards federal regulation, but not now. “There are too many issues involved,” he said. “Perhaps a year from now there will be some federal oversight.”

Iordanou said he was a staunch proponent of a federal charter, saying that federal regulation will enable the industry to better serve its customers and at lower costs.

Greenberg said that the state system of insurance regulation is an “anachronism.” He said: “Fully 40% of the insurance market is global to some degree. The state system is an impediment to growth. It is unlikely that we will get a federal charter right now, but we are closer than ever.” He added, however: “We have to be careful what we wish for. We don’t want federal regulation to be punitive.”