“We’ve survived worse things in the past, and we’ll survive this too.”
That’s the way William R. Berkley, founder and executive chairman of Greenwich, Conn.-based insurer W.R. Berkley Corp., opened his keynote speech Thursday at the 118th annual meeting of the American Institute of Marine Underwriters. “But it’s still an exciting time to be in the insurance business.”
Reviewing the global economy, Berkley noted that the U.S. election and Brexit are just the beginning of a global trend with the rest of Europe not too far behind. “The population is unhappy with the status quo and the social system,” he added, also pointing out Nigeria’s proposal to make owning U.S. dollars illegal, and India’s action in withdrawing large currency notes from circulation.
“China is in turmoil because it’s not growing fast enough to support its population,” Berkley said, “especially the increasing numbers of retired military and their pensions. The continuing problem in the Middle East is likely to increase pressure to build the Dakota Access Pipeline as a way to reduce dependency on foreign oil, and all of Africa is in turmoil.”
All these factors are likely to increase risk for marine insurance, which is currently dealing with the challenges of larger container ships with more cargo, larger cruise ships with many more passengers and crew, as well as a slower economy that means fewer goods being transported around the world.
Berkley was asked for his opinion of the effect of Brexit on London financial markets and the insurance industry. “If you’re in London, where can you move to?” he said. “And people really don’t want to relocate, as we found out when we considered moving employees from Delaware to Des Moines.”
London was a strong center for financial services for hundreds of years before there was a Common Market and a European Union, and it’s likely to remain so, Berkley said.
Addressing the topic of the 2016 presidential election, Berkley said that Trump wants to be known as a great president, even if he isn’t really sure what that means yet. His life is now dramatically different, but he hasn’t yet fully grasped the limitations the office of the president of the United States will impose. Every minute of his life is now scheduled, and that will be a challenge for him, he added.
For the next 12 to 18 months, Berkley predicted, the economy will get better. Trump will make deals with Congress to pass a budget and begin infrastructure repairs. He pointed out that in business Trump has always had smart advisers, and he’s likely to do so in the White House. “Will he listen to them? Who knows?” he said.
On the subject of immigration, there are likely to be some changes, but not as dramatic as Trump has talked about, Berkley said. Most people agree that there is a problem with some illegal immigrants who are also criminals or who have committed serious crimes in the United States, and those are the immigrants that Berkley believes Trump will target, not every immigrant. “He’s a pragmatic man,” Berkley pointed out. “Don’t confuse his rhetoric with reality.”
Effect of outside capital
Outside capital is coming into insurance in the form of investments from pension funds and hedge funds, Berkley said, earning investment income and underwriting profit. But they’re operating under the fallacy that underwriting profit is automatic when it’s not. Success in the insurance industry comes back to underwriting skill and expertise, he added. Capital and expertise are both needed, but in different ways.
If interest rates go up, alternative capital won’t leave the insurance industry, Berkley predicted. But a catastrophic loss — something like a new asbestos problem or multiple hurricanes — will make them leave. “If you don’t have a long enough view, you’ll be driven out,” he said.
Insurance is a long-term business in a short-term world that moves at the pace of text messages, Berkley observed, but results don’t happen that quickly, which makes pricing effectively a challenge. “The most exciting parts of this business require the most expertise,” he said, referring to the opportunity to insure risks that are one-off or unusual.
Berkley believes that artificial intelligence and emerging insurance technology will provide better data to make better underwriting judgments. As an example, he described investigators using artificial intelligence to detect art forgeries with 99 percent accuracy. “AI is exciting but frightening because we’re all going to have to change the way we do things and change is hard,” he concluded.