Catastrophes and Financial Crisis Test Insurers
NEW YORK, January 15, 2009 - The property/casualty insurance industry faced a series of challenges in 2008 as the financial crisis and natural catastrophes took their toll, but the insurance business model remains strong going forward, said chief executive officers (CEOs) participating in the View from the Inside Looking Out, a panel discussion at the 13th annual Property/Casualty Joint Industry Forum.
"We had the double whammy in 2008," said Charles (Chuck) Kavitsky, chairman, president and CEO, Allianz of America Corporation, adding:
"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."
Moderated by Dr. Robert P. Hartwig, president, Insurance Information Institute (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 survivor or beneficiary 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 being the alternative 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. "Diversification is a byproduct, and the operational 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.
Glaser noted that the value of insurance brokers is enhanced by the current volatile economic conditions. "It's one of those quirky idiosyncrasies that volatility happens to be good for the brokerage industry. It's not necessarily good for our clients, but certainly our clients come to rely on our advice a lot more in times of volatility," he said.
John T. Hill II, president and COO, Magna Carta Companies, observed 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."