CEOs Pledge To Hold The Line Against Soft Market

"There's no question our industry is moving forward with renewed strength. We've raised capital, raised rates and started moving our combined ratio in the right direction," Mr. Schiro said during the 15th Annual Executive Conference For the Property-Casualty Industry, co-sponsored by PricewaterhouseCoopers, Standard & Poor's, the Black Diamond Group and J.P. Morgan.

However, "let's not get too excited. We are not past all of our problems," said Mr. Schiro, who spoke on "Producing Credible Results." The Zurich-based executive cited a poor investment climate, an uncertain economy, rating downgrades, reserve problems, unreliable reinsurance recoverables and an "out of control" tort system as just some of the hurdles the industry has yet to clear in its quest toward sustainable profitability.

"Let's not get in a race for marketshare," he said, adding that "we need several more years of profitability" to reach an acceptable return-on-equity for the risks being underwritten by the industry?a theme emphasized again and again by CEOs speaking at the meeting.

"We must focus on the fundamental disciplines of our business?sound underwriting and claims management," said Mr. Schiro, who vowed that Zurich will "put our pencils down when the price isn't right," echoing a pledge voiced by several CEOs in attendance.

In a lunch with reporters following his address, Mr. Schiro said that "this recovery is a process, not an event," stressing that while prices are bound to ease in selected lines, "there are still too many fundamental factors going in the wrong direction" to justify a soft market.

Mr. Schiro was far from alone in his position. "It's hard to understand the euphoria over the rate increases of the past couple of years, since as an industry we still have so much farther to go to get to an even marginally acceptable return-on-equity," said Maurice Greenberg, chairman and CEO of American International Group in New York. "How can you attract capital to an industry with such dismal results?"

In his address, he said "rates are up, but that hasn't shown up in the bottom lines of a lot of companies because of balance sheet woes," citing reserve charges to cover underestimated exposures from prior years such as asbestos as well as underpriced mainstream business in the last soft market.

"It doesn't make sense to me to hear that rates are softening with results still so fundamentally poor," he said. "With interest rates as low as they are, we need a much lower combined ratio to attract capital.'

He said if rates flatten out or start to slip, return on equity "will fall below 10 percent again and no one will want to invest in our industry." Mr. Greenberg added that "in a risk business like ours, the pursuit of marketshare at the expense of earnings is not a great strategy."

Following Mr. Greenberg's speech, William Berkley, chairman and CEO of W.R. Berkley Corp. in Greenwich, Conn., said during a discussion of capital strength that "the goal of any carrier should not just be to sell more insurance and get bigger, but to make more money on a risk-adjusted basis. That requires adequate pricing."

During a panel discussion assessing the reinsurance industry, John Phelan, chairman and CEO of American Re-Insurance Company in Princeton, N.J., predicted that the market would remain "disciplined" for the next year or two because "reserving issues are not behind us, investment income will not be sufficient to fuel cash-flow underwriting, and there will be pressure from rating agencies."

Suggesting that the threat of a downgrade will keep carriers from recklessly cutting premiums, he said: "Let your earnings fall and see what happens to your rating."

However, he warned that "if we're not careful, all this talk of a soft market will become a self-fulfilling prophesy."

Brian Duperreault, chairman and CEO of ACE Ltd. in Bermuda, said fear of a soft market might be premature.

"The fact that there have been price adjustments doesn't bother me. It's natural to adjust rates according to risk, like the industry is doing in the property market. The rates are still reasonable and appropriate given the risk," he said. "However, the question is whether we as an industry will be disciplined enough to keep demanding appropriate rates, given the risks we're being asked to assume."

Lamenting that insurance industry returns on equity are "pathetic, and have been for some time," he said "if we start accepting prices knowing they are insufficient for the risks we're taking on, we deserve what we get, and the moment of truth is coming."

For all the talk at the meeting of the need for underwriting discipline, Mr. Duperreault conceded that "all bets are off" if investment income rebounds for insurers. "If interest rates go up, insurance rates are going to start to go down. That's the way it works," he said.

The challenge is to know when rates have dropped too far and to be prepared to cut back on lines where pricing is inadequate, he added.

"We're in the professional gambling business," he said. "As with any risk business, you have to know when to stop playing the game and when to fold. We have a lot of people in this industry who don't know how to play this game and are not natural risk-takers."