The fall of insurance industry giants in 2008 and the unravelingof the banking and credit markets provide our industry with anopportunity to learn some valuable lessons, according to executivesof NAPSLO member firms.

Carrier and wholesale brokerage leaders shared their reflectionson 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 takeawaysfrom 2008.

"Models still don't work," property-casualty insurance "remainsa cyclical business, and the industry still does not adequatelyapply the concept of risk-adjusted returns to capital managementand underwriting discipline," he said.

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

"We have failed to anticipate the impact of the mortgage crisisand how it flowed through the entire financial system in the UnitedStates and impacted our own balance sheets. We should always bechallenging ourselves on what we are not seeing that could comeback and affect our businesses, both positively and negatively," hesaid.

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

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

"Prior history is not always helpful in identifying whereexposures are," he said. "All insurance organizations shouldreconsider how they view risk within their organizations."

Peter Eastwood, president and CEO of Lexington Insurance inBoston, was one of several executives who shared thoughts aboutforeseeable but underappreciated risks.

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

"We believe that the likelihood of a serious terrorist event isunderappreciated as the American people have become somewhatcomplacent in this regard. Having just experienced a landmarkinauguration, it may be well to keep in mind that each newadministration for the past 50 years has faced the challenge of asignificant terror event, he said.

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

"What we have historically seen with the major [specialty] linesof business such as employment practices liability insurance in the1990s is that the buyers need to have either a claim or a veryclose call before they will actually add new coverage" into theirinsurance budgets.

Mr. Smith said a number of risks areas, for which specialtyinsurance coverage is available, are similarly unappreciated bybuyers, listing privacy, security and technology-related risks thathave a real potential to impact corporate balance sheets and incomestatements.

Scottsdale's Mr. Miller urged a continued focus of attention onthe risk of natural catastrophe exposures in our country. "Thereare still areas where the exposure and the price are not matched,"he said. "Loss potential continues to increase, people continue tomove into catastrophe-exposed areas, and we need to find betterways 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 AmericanInternational Group and other large insurers as they evaluated thelessons learned from last year.

"Any and every company is vulnerable. No sector of industry isimmune to a faltering economy," said Laura Corwin, vice presidentof primary casualty for Liberty International Underwriters inBoston.

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

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

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

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

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

"I believe Ironshore's build-out following Kevin Kelley'sdeparture from Lexington could have a meaningful impact on theE&S markets," he said, referring to the news late last yearthat Bermuda-based Ironshore had snagged two leaders of seniormanagement from Lexington--Kevin Kelley, the former chief executiveof Lexington, and Shaun Kelly, who had been Lexington's presidentand chief operating officer.

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

More recently, in late January, Ironshore announced that itwould team up with C.V. Starr & Co., an insurance operation ledby former AIG Chairman Maurice Greenberg, to launch Iron-StarrExcess Agency Ltd., a specialty lines insurance and reinsurancemanaging general agency. Iron-Starr Excess Agency Ltd. will offerup to $75 million of catastrophic excess casualty capacity forFortune 2000 companies and other excess financial and commerciallines insurance and reinsurance products, according to the Januaryannouncement.

Mr. Warde revealed that one of his company's broker partnersrecently "wondered if the U.S. government, as owner of AIG, wouldallow an offshore entity, such as Ironshore, to continue to raidLexington for talent."

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

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

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

Offering a related piece of advice for retail agents looking toexpand into territory previously uncharted by their firms, he said,"Wholesalers continue to provide very valuable knowledge aboutproducts and markets that retailers do not work with every day. Theunique experience and knowledge of the wholesaler provides newopportunities for agents to better serve and support theirinsureds."

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

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

David Price, executive vice president and chief underwritingofficer 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 cannotcontinue to pay claims and not expect rates to grow."

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

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

"It's hard to apply historical reactions to current events. Weare in uncharted waters, as the saying goes," he said. "Thedeteriorating economy, declining earnings, reduced premium demand,excess capacity and new players with capacity all combine to createan intriguing dynamic. How these factors all interact will beinteresting going into 2009," he said.