LOOKING TO THE FUTURE

Rough Notes, Mar 2007 by Zinkewicz, Phil

Panel assesses industry performance to improve future responses

A property and casualty insurance industry dealing from a position of financial strength plus new challenges facing that very industry were among topics under discussion at the 11th annual Property/Casualty Insurance Joint Industry Forum, sponsored in January by the Insurance Information Institute (I.I.I.). Held in New York, the forum consisted of two panels-the first consisting of industry observers commenting on the industry and the second made up of industry representatives.

The unspoken theme of this year's forum could have been characterized as "We're All Right Jack, But Where Do We Go From Here," with some speakers cheering industry performance over the last three years and others warning that softening of certain lines could damage the industry in years to come.

The first panel, titled "View From the Outside Looking In," consisted of Dr. Robert P. Hartwig, president and chief economist for the I.I.I., who moderated the discussion; Matthew Mosher, group vice president of Global P/C Ratings, A.M. Best Company; Jay Gelb, senior vice president and senior non-life insurance equity analyst, Lehman Brothers; George Dale, Commissioner, Mississippi Department of Insurance; and Brian Sullivan, editor, Risk Information, Inc.

At the start, Dr. Hartwig asked Dale to comment on current litigation in his state regarding the damage caused by Hurricane Katrina. In Mississippi, courts are sitting in judgment over whether certain damages were caused by wind or flood.

Dale said that, as of the time of this forum, no settlements had been reached. "My concern is to make sure that the consumer is protected," he said. "I don't want to see a situation where settlements result in insureds getting coupons and the lawyers running off with all the money." But Dale added that settlements over litigation are only part of the problem. "Settlements over Katrina are important, naturally, but what is even more important is that the industry and regulators come to grips with the issues involved. The industry and the courts have to determine whether wind-driven water is covered under the standard homeowners policy or whether it isn't."

Sullivan agreed with Dale. "What needs to be done is to settle the fights about the past but make the issues clear in the future. We need to know if wind-driven water is a covered event, whether it is a flood or whether it is wind. The definition of that is what needs to come out of this or else there is no future certainty."

Dale said that, immediately after Katrina hit and then subsided, he made a statement to the press to the effect that, in a certain number of cases, flood damage would not be covered under homeowners insurance. "I was inundated with letters from people who claimed I was in the pocket of the insurance industry. So feelings are running high. The same thing happened after Hurricane Camille in 1969, and the issues have not been resolved yet."

Another subject addressed by the panel is the current positive financial situation that the property and casualty industry is enjoying. Dr. Hartwig said 2006 was a record year for the industry, with net income after taxes at nearly $60 billion, according to the latest estimates. The industry also delivered its best return on equity in about 20 years-in the range of 14%.

"What is driving that is the industry's very strong underwriting performance," said Dr. Hartwig. "We are looking at potentially the best combined ratio in 60 years, maybe in the low 90s." Dr. Hartwig said this was due partly to the huge drop in insured catastrophe losses, which went from $62 billion in 2005 to just $8 billion in 2006. From the investment standpoint, Gelb said he expected industry earnings to remain at robust levels in 2007 and 2008, though perhaps lower than 2006 levels. "Overall the industry's returns probably peaked in 2006, and part of that is because we had very low catastrophe losses last year. However, the strength of the industry's balance sheet would allow it to sustain these results going forward."

Will the industry's favorable results lead to excessive competition as in years past? Sullivan said that the industry doesn't appear to be running down "the slippery slope" of price cuts right now. "We have seen more pricing discipline, particularly in personal lines, in the last five years," he said. "I think it is because no one knows what to do. Everyone wants to grow profitably, but the question is how. I don't think anybody has been in a situation where we are not cutting prices to grow market share. This would change only if someone were to do something stupid, or there is an unexpected claims shock."

At the second panel on the forum's agenda, "View from the Inside Looking Out," insurance executives took a more detailed look at market conditions.

The panel consisted of Marc Racicot, president, American Insurance Association, who served as moderator; Martin J. Sullivan, president and CEO, American International Group; Jeffrey A. Ludrof, president and CEO of Erie Insurance Group; Brian M. Storms, chairman and CEO, Marsh, Inc.; William J. Mullaney, president, MetLife Auto & Home; Paula Rosput Reynolds, president and CEO, Safeco Corporation; Pierre L. Ozendo, CEO-Americas Division, Swiss Re; and James J. Schiro, CEO, Zurich Financial Services.