Low interest rates, rather than storm losses, are driving the bulk of the rate increases in the insurance industry, says a company CFO.
Speaking on a CFO panel at the 23rd annual Executive Conference, Michael McGuire, CFO at Endurance Specialty Holdings, predicted that the economy would be mired in a low-interest-rate environment for the foreseeable future, and he said the industry needs to see at least three more years of price increases. The line likely to see the biggest increases—of 10 percent or more—is workers’ compensation, which is “like a noose” around the necks of carriers with a lot of workers’ comp exposure on their books.
And echoing a sentiment heard from C-suite executives throughout the year, McGuire said there’s now more focus than ever on underwriting profit: The days of being able to earn a respectable return on equity with a 110 combined ratio are long gone.
For investors in the audience, he noted that insurance companies, which tend not to attract mainstream institutional investors, are “cheap stock” right now. He added that they tend to offer safe returns; that insurers fared well during the financial crisis; and that the “downside is baked in” to the price.
While analysts are eager to see consolidation among Bermuda insurers and reinsurers, such as Endurance, the current “clustering of valuations makes M&A deals difficult—there’s no spread,” McGuire pointed out.
McGuire also had plenty to say on the question of—and opportunities arising from—climate change. “Without taking a point of view on what’s driving it, it’s clear that something has happened. We’re in a significant period of global cat activity—it’s the new reality. We expect continued volatility and severity.”
But, he added, “This is a great driver of demand,” and clients being motivated to buy more protection is great for business. “I disagree that [the industry] is not prepared for dealing with climate change,” he added. With science and technology helping guide the allocation of capacity, insurers are well-equipped to deal with catastrophes, he argued. “We just need to make sure we’re charging enough.”
Regarding Superstorm Sandy, McGuire said he and other insurers “were holding our breath” given the huge total-insured value of property in the affected regions. “It actually could have been a whole lot worse—a Cat 2 or 3 storm would have caused $100 to $150 billion in losses.”
The biggest surprise of 2012? “The commercial losses from the Thai floods,” he said. Floods “are a difficult peril to underwrite [to begin with]; add on Business Interruption and Commercial Business Interruption, and that’s how losses get out of control. There’s no diversification [of risk] when all is under water.”
One upshot of the Thai floods: Insurers will be more wary or risk concentrations in large, urban centers and will reevaluate deductibles and exclusions in the commercial-property class.
The prospect of greater regulation—such as Solvency II—is an “irritant,” McGuire said. For insurers that already have a true, risk-based view of their capital, new rules won’t change their way of business but will require extra work to comply. “We’ll never get away from [regulation by] local jurisdictions.” So any additional, international statutes “are all additive” to the regulatory burden.