Securitization Expected To Remain Important For P-C Market

NEW YORK--While insurers are breathing a sigh of relief that 2006 will pass without a major catastrophe, the industry is still in financial recovery and securitization will continue to play a major role in that recovery, according to executives at Swiss Re.

In its latest report, "Securitization--new opportunities for insurers and investors," the company said the practice for the industry, while around a decade old, still remains new, but growing as reinsurers and insurers look to provide capacity for client's catastrophe risks through catastrophe bonds.

In the past five years, the report notes, the property-casualty securities have doubled, and coupled with life bonds, have taken the volume of securities to $23 billion. By 2016, the volume of insurance-linked securities is expected to grow to between $150- and $350 billion, and remain an important source of capacity for the industry, the reinsurer estimates.

Coinciding with the release, Swiss Re held its 8th annual year-end Economic and Industry Review in New York.

Speaking during the review, Pierre L. Ozendo, chairman and chief executive officer, Swiss Re America Corporation, and head of Americas property-casualty division, noted that the industry has benefited from improved economics in 2006, with a combined loss ratio of 92 percent for the first half of the year and anticipated 95 percent combined ratio by the end of 2006, barring any catastrophes.

The industry should also enjoy an investment return of close to 5 percent, which he said is "conducive to continued underwriting discipline" for the future.

The industry's continued attention to underwriting discipline has contributed to the its success, said Mr. Ozendo, and continued restrained investment returns means the industry will not return to "underwriting foolishness" for the next year or two. He said the industry will see a return on earnings of 15 percent, reflective of the disciplined underwriting.

The impact of Hurricanes Katrina, Rita and Wilma in 2005 took a toll on the industry in the neighborhood of $65 billion in losses, Mr. Ozendo noted, and pointed out to insurers the need to diversify their books.

He said while Swiss Re sustained significant losses, those with less diversification suffered greater losses in comparison to their overall books of business.

The demand for securitization, he continued, is helping insurers to diversify their books, by filling in the capacity gap and mitigating some significant risks. However, with the investments that have been made, it still remains insufficient to make up for the industry's losses so far, he added.

Swiss Re is supporting the reauthorization of the Terrorism Risk Insurance Act for at least a five-year period, a position supported by Democratic House leadership, said Roger Ferguson, chairman of Swiss Re America Holding and a former member of the U.S. Federal Reserve Board.

He said he personally would like to see a permanent federal backstop program in place for insurers' catastrophic terrorism losses.

Mr. Ferguson argued that for insurers, the risk is simply uninsurable, and carriers could not develop enough capacity to cover a major act of terrorism in a high risk area.

TRIA would reduce ambiguities over the ability to recover from an act of terrorism and remove question over the ability of federal government to assist in recovery. It would also give insurers the ability to adequately price a risk and lower premiums, making it more affordable and more available to more clients, said Mr. Ferguson.

Reviewing the whole economy, Kurt E. Karl, Swiss Re chief economist for North America, said the U.S. economy is in for a soft landing, with zero percent growth for the fourth quarter and 3 percent total growth for the year.

Swiss Re finds the possibility of a recession occurring does not appear likely, but one may arrive by 2011 or 2012.

"The economy runs out of steam after a while," said Mr. Karl. The current state of the economy also points to "tight underwriting" to continue, he added.