P&C leaders take market pulse

Risk & Insurance, March 3, 2003

The length of the current hard market should not be overestimated and the creativity of the plaintiff's bar to impose new costs on insurers should not be underestimated. That was the message delivered at the seventh annual Property/Casualty Insurance Joint Industry Forum in New York in January. Industry experts met to deliver a skeptical outlook to constituents.

"I'm not predicting what the stock market is doing but it's very difficult to see a 25 percent return on something from where we are now," according to Walter Kielholz, vice chairman at Swiss Re, a participant in a nine-member-roundtable discussion. "I see a lot of pressures on the balance sheet coming from interest rates, maybe as early as the end of this year ... the big unknown for me is also this war situation. It's unclear what economic scenario will follow."

Lower returns-on-equity will continue to be an issue that insurers will face. "We need to have access to more flexible and cheaper sources of capital than pure equity capital," according to Kielholz. Being limited to one source of capital has been damaging during the stock market slump, he said.

"The industry," he said, "could increase the return on equity considerably if there were other sources of capital available, flexible sources with capital forms which will not be used if the pricing levels are low, which will not force the industry to write more bad business on the same capital if prices are going down, but can step down and give capital back in the short term."

"Companies think that over the course of the cycle they're going to achieve a certain return on equity; the implication being that during the hard market they'll get a 20 or 30 percent return, which will fund the inevitable downturn," said Alice D. Schroeder, managing director for Morgan Stanley, a participant in another panel discussion. "I doubt whether companies would achieve the return they expected, partly because the current investment environment won't permit it, but also because there's greater transparency of information than in past cycles."

Schroeder said opportunities now are more short-lived. "You can't arbitrage your own industry the way you used to. People have learned from the last cycle and, as a result, you have to run your business differently."

Interest rates are at a 40-year low and have made it increasingly difficult to make a profit, the speakers said. The industry is struggling to make an underwriting profit, but figures companies are coming up with are not enough for investors, said Vincent J. Dowling Jr., managing partner and senior stock analyst of Dowling & Partners Securities.

Dowling contended that for every dollar collected in premiums, insurers should be paying 90 cents in claims; unlike the $1.05 they paid out in the first months of 2002.

Soaring medical malpractice awards, according to Michael S. Pritula, director with McKinsey & Co., are a testament to the creativity of the plaintiff's bar. He said the courts need to address this issue. "Without some change in either the state insurance rate-setting mechanism or changes in the judicial and civil justice system, this problem is not going away. The industry can't earn a return on this line of business."

Pritula predicted that states will experiment with new medical malpractice funding methods that may include dropping the tort system and surcharging health insurers. That opens the door for health insurers to pass the charge on to policyholders. This, he contended, will result in consumers paying for the excesses of the plaintiff's bar.