The fact that the property-casualty insurance industry is bouncing back quickly from the third-quarter's hurricanes, doesn't mean that executives are any smarter in terms of the way they've managed exposures, analysts told an insurers meeting.
That assessment was delivered Thursday by Steven Dreyer, managing director of Standard & Poor's and Frank Medici, managing director of Morgan Stanley, during the opening session of the 17th Annual Property-Casualty Insurance Conference in New York.
Overall, the industry held up well, Mr. Dreyer said, noting that given the enormity of the events==amounting to perhaps $80 billion in losses==there were no insolvencies.
In fact, many companies were able to absorb losses with a couple of quarters of earnings, he said.
But whether the industry "dodged a bullet" or exercised great risk management is open to debate, he said.
Even companies that sustained losses larger than can be offset by several quarters of earnings have "somehow been able to replenish lost capital," he said, referring to the "bottomless pit of capital that seems to re-up even though …money seems to fly out the door" year after year.
Mr. Medici was equally amazed at the ability of some companies==including monoline catastrophe writers that lost 20-to-60 percent of their capital==to refill the bulk of it.
"Investors are very forward looking," he reasoned. "They expect, and are hearing from the industry, that pricing is better [and] they've bought into the story," he said, noting that they are also looking for risks uncorrelated to interest rates, the economy, and political situations.
Mr. Medici continued: "The ability to bounce back from a capital perspective leads me to believe [insurers] are not going to be that much smarter because there does seem to always be this ability to re-tap the market in times of need."
Mr. Dreyer said he has seen evidence that the industry has already grown dumber.
For the last couple of years at the conference, there has been much discussion dedicated to terrorism=="something that's hard to understand, harder to insure," he reported. "But it has been a given that homeowners insurance is something that we all understand, [and that] this industry had learned…after [Hurricane] Andrew how to do smart things like not insuring three houses in a row on the same street."
But it turns out that insurers really haven't gotten a good handle on just their basic homeowners' risks. "Days and weeks" after the hurricanes, insurers "had a very hard time answering very simple questions like, 'Can you tell us what your total insured sums are in that area?'" said Mr. Dreyer.
"I don't know how you can be a CEO of an insurance company, and two weeks after Katrina not know what your insured limits are," he said.
"We better get smarter," he added, noting that "terrorism is a lot tougher than homeowners."
Mr. Medici said that people who invested in the 2001 start-ups did very well, and many investors expect good returns again. "The concern is that we'll recapitalize all these companies now, and…risk management [doesn't] improve significantly when next August rolls around."
In 2005, it had been a number of years since the last mega-event, the 9/11 attacks, he said. While people's memories are somewhat short, "if there's a hit to capital again next year, it may not be as easily replaced," he predicted.
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