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Business Built Around ‘Liability Risk’ Remains Vulnerable to Natural Disasters

INSURANCE INFORMATION INSTITUTE
New York Press Office: (212) 346-5500; media@iii.org

NEW YORK, January 15, 2010 — The U.S. property/casualty (P/C) insurance industry performed remarkably well between 2007 and 2009, three of the most challenging years for the economy in decades, a group of industry experts observed today at the 14^th annual Property/Casualty ̽����ѡ Joint Industry Forum, held here.

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Businesses with asset risk exposure, such as banks and brokerages, fared much worse during the recent economic downturn, according to panelists on the View From the Outside Looking In. P/C insurers do have reason to be concerned about the multi-year decline in net premiums written dating back to 2007, the group agreed, as well as the threat of natural catastrophes, which could cause tens of billions of dollars in insured losses.

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“If you look at the performance of the property and casualty industry versus other financial sectors, it has been a stellar performance,” said Joseph Guastella, partner, ̽����ѡ Industry, Strategy and Operations, Deloitte, something he attributed to the effective risk management practices and prudent supervisory oversight of insurers.

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The group pointed out that the relative calm of the 2009 hurricane season, as well as some reserve releases, were seen as the key reasons P/C insurers’ net income after taxes (profit) totaled $16.2 billion during the first nine months of 2009, nearly quadruple the $4.4 billion earned in the year-earlier period. Moreover, the $16.2 billion profit figure was earned entirely in the second and third quarters of 2009, more than offsetting the $1.3 billion loss P/C insurers recorded during the first quarter of 2009, they said, citing ISO/PCI’s third quarter 2009 report on P/C industry financial conditions.

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“One of the great untold stories of the last year is how well the insurance sector in general has done,” said Professor Scott Harrington, University of Pennsylvania’s Wharton School. “Even the life companies, given what happened in residential mortgage-backed securities and asset markets, their performance of the overall sector has been truly remarkable.”

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“The business model of the property/casualty industry is not as much about asset risk as the other financial sectors are; it’s about liability risk,” said Therese Vaughan, chief executive officer, National Association of ̽����ѡ Commissioners (NAIC).��

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Vaughan, a former Iowa insurance commissioner, said, however, that identifying insurers who may face financial trouble remains a challenge, even though regulators track constantly a company’s loss reserves and actuarial opinions.��“On-site regulatory exams are the only sure way to get a definitive handle on an insurance company’s finances,” she added, “although agents who are on the ground are often the best source of real-time information on an insurer’s activities.”

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The news is not all good for P/C insurers, noted the panel’s moderator, Peter Miller, president, American Institute for CPCU, who pointed out that cumulative net premiums written were down more than 4 percent in 2009, the third consecutive year of decline.

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“The property/casualty insurance industry is not going to see positive growth any time soon,” said Jay Gelb, director, Barclays Capital. “It’s with near-certainty that we’ll have three years of annual decline between 2007 and 2009. My estimate is that the industry will probably show a decline in 2010, as well, which would be the worst track record of growth for the industry since the Great Depression.”��

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The economic downturn is impacting commercial insurers more than those who focus on personal lines because commercial insurers’ fortunes are tied more closely to a slowdown in new business formation, payroll declines and reduced construction spending, Gelb added.��

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In the personal lines market, larger insurers are reducing their market share in coastal communities or buying more reinsurance, the panel agreed, creating a situation where smaller insurers are taking on more risk.

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“The industry is going to take a hit on claims handling when the next big storm comes,” predicted Brian Sullivan, editor and publisher of Auto ̽����ѡ Report and Property ̽����ѡ Report, pointing to the rise of smaller property insurers in states such as Florida.

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The panel also agreed that the creation of a Federal ̽����ѡ Office within the U.S. Treasury Department was a likely outcome of the current regulatory reform debate in Washington, D.C.

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The Forum is sponsored by: ACORD, American Institute for Chartered Property Casualty Underwriters, American ̽����ѡ Association, the Association of Bermuda Insurers and Reinsurers, The Geneva Association, Institute for Business & Home Safety, ̽����ѡ Information Institute, ̽����ѡ Institute for Highway Safety, International ̽����ѡ Society, ISO, National Association of Mutual ̽����ѡ Companies, National Council on Compensation ̽����ѡ, National ̽����ѡ Crime Bureau, Property Casualty Insurers Association of America, Property Loss Research Bureau and Reinsurance Association of America.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.