Its My Party And I'll Cry If I WantTo

New York

The faces were mostly glum and the humor was of the gallowsvariety when the biggest honchos in property-casualty insurancegathered here for the annual Joint Industry Forum.

At first blush, a casual observer might expect some celebrationgiven recent developments. After all, net written premiums rose ahealthy 13.6 percent through the first three quarters of 2002–thelargest jump since the 23 percent posted in 1986. This gain is evenmore significant, coming during a time of low inflation.

Meanwhile, the latest “Market Barometer” compiled byMarketScout.com in Dallas showed a hefty 30 percent average p-crate hike in December. The soft market–the “Wicked Witch” thatvexed the industry for what felt like an eternity–is dead at last,with no resurrection in sight.

Add to that passage of the Terrorism Risk Insurance Act, givingcarriers a desperately needed federal backup, as well as theRepublican takeover of Capitol Hill, which holds out the hope oftort reform, and p-c insurers seem to have reason to party. Yet itwas a somber mood indeed at the Forum this year, fueled by a numberof long-term and looming problems, including:

Uncertainty over whether the terrorism backstop, which forcescarriers to at least offer to write the risk, will actually makecoverage affordable. If the law fails to do the trick,policyholders, state regulators and the U.S. Congress will befurious, and they could come down on the industry with avengeance.

Concern over whether the industry can generate areturn-on-equity that will attract badly needed capital. Theindustry's combined ratio through three quarters last year droppedfrom 114.4 to 104.9. However, those here seem to agree that a ratioin the low-to-mid-90s is required to post an ROE in themid-teens–the minimum necessary to attract new capital. Theconsensus is the industry will have a hard time getting its ROEabove the high single digits, especially if investment returns areflat or down.

Speaking of investments, insurers and analysts here were verybearish. While the stock market has rebounded of late, any upsurgewill be short-lived if war with Iraq breaks out, many here noted.Meanwhile, bonds, with interest rates at historic lows, willdeliver a double-whammy to insurers, especially with a host ofhigher-yield holdings turning over at far lower returns.

Further reserve adjustments would put an added burden onstruggling carriers and make attractive ROEs even harder to attain.On the day of the Forum, Travelers announced a $2 billion boost inasbestos reserves, sending a chill through the crowd of CEOs here.“Travelers clearly set a new standard for reserve adequacy anddisclosure today, and other companies will have to scramble tocatch up,” warned Alice Schroeder, managing director at MorganStanley in New York, during an analysts' panel discussion.

The reinsurance market, particularly in Europe, is in a veryweakened state, thanks to the long-term impact of soft marketpricing, mounting catastrophe losses, and steep stock marketdeclines. That means primary carriers will have a harder timelaying off risk, will have to hold onto more exposure themselves,and will have to pay more for reinsurance coverage.

Insurers here were skeptical about the prospects for passage ofsignificant tort reform to get asbestos, medical malpractice andother troubled lines under control, even with Republicans takingcontrol of the U.S. Senate, and an M.D. as Senate Majority leader.Indeed, in a poll of the 200 or so executives in attendance, 76percent said Washington would not deliver “meaningful” tort reform,while 86 percent said they expect no civil justice relief on theasbestos front either.

Insurers here were also tense because of increasing pressurefrom stock and rating analysts. There are a lot more probingquestions being asked, they reported, and they fully expect moredowngrades. Analysts are in no mood to give any insurer the benefitof the doubt, not with under-reserving still a big issue.

What does this all mean, based on the assembled wisdom here?

Basically, it's back to basics. For the foreseeable future,insurers are in the insurance business again. Rather than live offcash flow and investment returns, they must write insurance for aliving, and that means writing at a profit. Underwriting, claimshandling and litigation management must be meticulous. There is nomargin for error.

That leaves one more fear cited by the CEOs here–whetherinsurers have the intellectual talent, discipline and skills to getthe job done. Joseph Brandon, chairman and CEO of GeneralReinsurance Corp. in Stamford, Conn., spoke here about an“execution challenge” facing the industry, bemoaning that insurershad allowed some of their basic skills–underwriting, claims,actuarial–to “atrophy” during the soft market.

It's no wonder that no one here struck up a chorus of “HappyDays Are Here Again” after hearing this litany of despair, and youcan't blame insurers for assuming the worst with so little light atthe end of the tunnel.

Still, it's quite possible that a year from now we'll havesomething to cheer about–Congress might deliver tort reforms; thebulls may return to Wall Street; and there hopefully won't befurther terrorist attacks, major natural disasters, or war withIraq. Just don't count on it.

Insurers can only count on themselves. They must hunker down andcontrol as much of their own destiny as possible by writingcoverage at a healthy profit. If they can pull that off, they willhave a real reason to party.

Sam Friedman is Publisher and Editor-In-Chief of NationalUnderwriter. He may be reached at [email protected].

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, January 20, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.