The fall of insurance industry giants in 2008 and the unraveling of the banking and credit markets provide our industry with an opportunity to learn some valuable lessons, according to executives of NAPSLO member firms.

Carrier and wholesale brokerage leaders shared their reflections on the most relevant lessons with NU's NAPSLO Daily.

Robert Berkley, executive vice president of W.R. Berkley Corp. in Greenwich, Conn., believes there are three important takeaways from 2008.

"Models still don't work," property-casualty insurance "remains a cyclical business, and the industry still does not adequately apply the concept of risk-adjusted returns to capital management and underwriting discipline," he said.

Michael Miller, president of Scottsdale Insurance Company in Scottsdale, Ariz., said the first lesson is that "risk management should be on everyone's radar screen in dealing with all situations."

"We have failed to anticipate the impact of the mortgage crisis and how it flowed through the entire financial system in the United States and impacted our own balance sheets. We should always be challenging ourselves on what we are not seeing that could come back and affect our businesses, both positively and negatively," he said.

In a similar vein, Robert Sargent, executive vice president of Mercator Risk Services in Hartford, Conn., said the prospect of unforeseen risks was one of the clear messages of 2008.

"Risk can manifest itself in many ways, often unexpected," he said. "Who would have anticipated the financial challenges the largest specialty insurer has had to face?" Mr. Sargent said, referring to American International Group.

"Prior history is not always helpful in identifying where exposures are," he said. "All insurance organizations should reconsider how they view risk within their organizations."

Peter Eastwood, president and CEO of Lexington Insurance in Boston, was one of several executives who shared thoughts about foreseeable but underappreciated risks.

"I would...caution against any level of complacency as to the threat of terrorism risk," he said, delivering a message relevant to buyers and sellers of insurance.

"We believe that the likelihood of a serious terrorist event is underappreciated as the American people have become somewhat complacent in this regard. Having just experienced a landmark inauguration, it may be well to keep in mind that each new administration for the past 50 years has faced the challenge of a significant terror event, he said.

Scott H. Smith, president of S. H. Smith & Co. in Hartford, Conn., said his firm is always evaluating business trends and potential risks that emerge from new developments, along with the impacts unmanaged risks could have on the financial statements of insurance buyers.

"What we have historically seen with the major [specialty] lines of business such as employment practices liability insurance in the 1990s is that the buyers need to have either a claim or a very close call before they will actually add new coverage" into their insurance budgets.

Mr. Smith said a number of risks areas, for which specialty insurance coverage is available, are similarly unappreciated by buyers, listing privacy, security and technology-related risks that have a real potential to impact corporate balance sheets and income statements.

Scottsdale's Mr. Miller urged a continued focus of attention on the risk of natural catastrophe exposures in our country. "There are still areas where the exposure and the price are not matched," he said. "Loss potential continues to increase, people continue to move into catastrophe-exposed areas, and we need to find better ways to handle this for the long-term health of our business."

This will "require cooperation from the insurance industry, political bodies and the people" of the United States, he said.

Other executives focused on the turmoil at American International Group and other large insurers as they evaluated the lessons learned from last year.

"Any and every company is vulnerable. No sector of industry is immune to a faltering economy," said Laura Corwin, vice president of primary casualty for Liberty International Underwriters in Boston.

"Swiss Re could be a developing story and [Warren] Buffett's infusion of capital is telling," observed Nathan Warde, president of Aspen Specialty in Atlanta, referring to the recent announcement that Mr. Buffett's Berkshire Hathaway would provide $2.6 billion to the ailing European reinsurance giant.

Christopher Timm, president of Century Insurance and executive vice president of Southfield, Mich.-based Meadowbrook Insurance Group, said, "One of the biggest lessons I believe we are still learning is that one company does not make an industry."

"There is a mood in Washington that AIG is a proxy for the insurance industry. It has filtered down to the average person," Mr. Timm said.

"We all need to be solid advocates for our industry and the admirable financial performance we have posted during these difficult times. We have learned, and need to make sure the general public understands, that state regulation has worked very well.

Aspen Specialty's Mr. Warde also focused on the reactions of competitors to the plights of troubled carriers.

"I believe Ironshore's build-out following Kevin Kelley's departure from Lexington could have a meaningful impact on the E&S markets," he said, referring to the news late last year that Bermuda-based Ironshore had snagged two leaders of senior management from Lexington--Kevin Kelley, the former chief executive of Lexington, and Shaun Kelly, who had been Lexington's president and chief operating officer.

Kevin Kelley became Ironshore's new CEO, replacing founding CEO Robert Deutsch, who is now Ironshore's president. Shaun Kelly took on the role of CEO of Ironshore's U.S. Operations.

More recently, in late January, Ironshore announced that it would team up with C.V. Starr & Co., an insurance operation led by former AIG Chairman Maurice Greenberg, to launch Iron-Starr Excess Agency Ltd., a specialty lines insurance and reinsurance managing general agency. Iron-Starr Excess Agency Ltd. will offer up to $75 million of catastrophic excess casualty capacity for Fortune 2000 companies and other excess financial and commercial lines insurance and reinsurance products, according to the January announcement.

Mr. Warde revealed that one of his company's broker partners recently "wondered if the U.S. government, as owner of AIG, would allow an offshore entity, such as Ironshore, to continue to raid Lexington for talent."

Mr. Timm said the events of 2008 also reinforce the danger of relying on investment income to make up for aggressive underwriting. Results were "especially aggravated by the fact that, at the same time there was stress in the underwriting and investment business, the economy was weakening," he said.

Alan Jay Kaufman, president and CEO of Burns & Wilcox in Farmington Hills, Mich., said, "The key lesson learned in 2008 is that companies need to stick with what they know."

"Do not expand into other industries even if they look profitable," he warned.

Offering a related piece of advice for retail agents looking to expand into territory previously uncharted by their firms, he said, "Wholesalers continue to provide very valuable knowledge about products and markets that retailers do not work with every day. The unique experience and knowledge of the wholesaler provides new opportunities for agents to better serve and support their insureds."

Scott Smith, president of S. H. Smith & Co. in Hartford, Conn., said, "I hope the marketplace remembers the dangers of highly speculative types of insurance. This relates to a concept that has resulted in an insurer getting into trouble many, many times over the last 200 years--and that is the concept of a financial guarantee.

"I think the insurers are best when they understand that they are transferring a fortuitous risk and not a business risk," Mr. Smith observed.

David Price, executive vice president and chief underwriting officer of Burns & Wilcox, said another lesson from 2008 is "that it is essential that there be a flight to quality."

Offering yet another, Mr. Price said, "The industry cannot continue to pay claims and not expect rates to grow."

Was that lesson, or any lesson actually learned by industry participants in 2008?

No, said Robert Owens, president of RPS of Lexington, a unit of Risk Placement Services in Kentucky.

"It's hard to apply historical reactions to current events. We are in uncharted waters, as the saying goes," he said. "The deteriorating economy, declining earnings, reduced premium demand, excess capacity and new players with capacity all combine to create an intriguing dynamic. How these factors all interact will be interesting going into 2009," he said.

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Industry Executives Reflect On 2008 Lessons

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