AAMGA execs assess industry's ability to cope with hurricanes

AS HURRICANE season gets into full swing, all segments of the insurance business are speculating about what may lie ahead and how the industry will respond. At the American Association of Managing General Agents' annual convention, which was held in May on Maui, in the Hawaiian Islands, the issue dominated a press conference attended by the association's executives. Those taking part were Francis Johnson, president of Johnson & Johnson Inc. in Charleston, S.C., who wrapped up his term at the meeting; Scott M. Anderson, CIW, CIC, CPCU, executive vice president of Concorde General Agency in Fargo, N.D., AAMGA's new president; and Thomas K. Albrecht, president of The Barclay Agency in Montgomery, Ala., and the association's president-elect. Also on hand was Bernd G. (“Bernie”) Heinze, Esq., AAMGA's executive director. Following are their edited comments concerning hurricanes and other matters.

oOn the state of the market for property coverage in coastal areas, as a new hurricane season progresses.

Johnson: I agree we have a crisis. The first reaction to last year's hurricanes from a lot of carriers has been to withdraw. But historically following such catastrophes, insurers have come back over time–and generally that's because of our prodding and trying to convince them that they can come back and find a way to do so profitably. We can't do that overnight, because the past hurricane season was pretty severe.

The amount of capital that has been raised in Bermuda has been phenomenal. Now, we just need to get that capital back to the marketplace. We'll find different ways of using that capital, whether it's through captives, or whether we find paper or Bermuda finds paper to use in the U.S., or whether it's via the traditional reinsurance market. That capital will be used at some point.

Albrecht: In Alabama, historically the insurance market has always come back following a catastrophe. There's always been somebody willing to fill the void. I think right now there is going to be a shortage of insurance, but I think the need will be filled ultimately, maybe in a year or two. But right now, there are going to be some problems.

Heinze: I think a lot depends on what happens domestically, what the condition of the capital marketplace is, what private equity and hedge funds do, what return on equity we're able to produce in the insurance marketplace, etc. Specifically in the E&S sector, much will depend on what we can do as entrepreneurs to provide more shareholder equity and incentives to investors and to persuade them this is a good business segment to invest in.

Anderson: If the price for coverage gets high enough, there probably will be more capital provided. But I'm not sure, at the end of the day, if the consumer is going to buy if the price is $10 per $100 of coverage.

Heinze: We've have a number of our members who've had to reinvest themselves, who were pure property writers for many years. And now, with the condition of the marketplace being what it is, they're going into the casualty marketplace.

oOn the effects of regulatory rate suppression in hurricane-prone areas.

Johnson: Our trade association believes that free markets are the best way to go, as opposed to any kind of intervention. We will compete with each other in the correct way, and the rate will fall where it needs to be.

oOn the likelihood that another severe hurricane season could change the market.

Albrecht: I thought last season's storms would change the market, but they haven't. I thought we'd at least see a leveling off of rates, but it didn't happen, except in the critical areas. In the Midwest, you have a lot of regional property-casualty companies that don't buy much reinsurance. For them, it's business as usual. Even in Alabama, if you go toward the coast, you have problems with property insurance. But if you go to Birmingham, which is not that far away, the market is competitive.

oOn the implications of continued storm severity for insurers' solvency.

Johnson: Bernie and I recently provided input to A.M Best for their annual surplus-lines report, and we commented on how much stronger the industry has been than in the past. I think rate flexibility in the surplus-lines market gives carriers a much better chance of surviving through any kind of cycle. I think our market showed how strong it was last year.

oOn the industry's performance handling claims from last year's hurricane season.

Johnson: I think every time we go through a storm, we're going to learn something. Following Katrina, just finding claimants was a significant issue for a lot of companies. Claimants didn't have mailboxes–or even houses. I think that was one of the biggest issues following Katrina, finding the people. But I think the industry has done an incredible job overall.

Albrecht: There are always going to be some lingering, outstanding claims. Some of these things get into litigation and go on for a long time. But I think that the response, under the circumstances, was as good as it could have been. But we're also learning from it.

oOn MGAs' changing relationships with admitted and nonadmitted carriers in a softening market.

Johnson: In our organization, we have a standard-lines division and an excess-and-surplus lines division. We see a little more of standard-lines companies competing for E&S business–not as much as we saw in the last soft market, but the Southeast is a little tighter than the rest of the county. What I mainly see is just everybody cutting prices. Anderson: Our ability to move back and forth between standard and E&S markets enables us to accommodate agents and accept the challenges they place in front of us. I really think there's a segment of the market that traditionally has been E&S, however, and that needs to stay there.

oOn AAMGA's political role.

Johnson: I think we need to continue to speak out at both the state level and federal level. We have done a great job with Tom's help and our governmental affairs board, which speaks about 25 times a year to the National Association of Insurance Commissioner and the National Conference of Insurance Legislators.

Heinze: There's been a complete paradigm shift on what this association stood for and what it represents today. If you look at last October's A.M. Best E&S report, it showed that the E&S marketplace today has $33 billion of annual written premium–14.14% of the entire property-casualty market. Our members represent $23.9 billion in annual written premium (about 85% in E&S premiums). So the association has a responsibility to help educate regulators, legislators and consumers on the benefits of this marketplace.

oOn AAMGA's role in education.

Heinze: This is the only trade association that has a full-fledged, nonprofit university dedicated to educating people on technical as well as professional issues. In the past 12 months, the university has served 5,517 people, up from about 2,000 just 24 months ago. The university is certified in all 50 states to offer continuing education.

Also, the Charter Insurance Institute in London, England, has just granted AAMGA an exclusive license to teach what is referred to as the Lloyd's and London Market Insurance Test. In August, we will begin teaching the preparatory aspects of the examination to our University Weekend attendees. The test will follow in late August or early September. You must pass the test to do business in London as a London broker.