Why Did The Camel Cross The Road?

I had a feeling I was in for an interesting day when I was almost run over by a herd of camels while crossing Rockefeller Center yesterday on my way to National Underwriter's 20th Annual Executive Conference for the Property-Casualty Industry. Read on for a recap of some of the highlights.

Frankly, I never thought I would see camels strolling a block from where workers were busy decorating the Rockefeller Center holiday tree. (Their handlers explained the camels were getting some fresh air and exercise while preparing for their next Christmas Spectacular performance at Radio City Music Hall.)

But then again, I never thought I would see American International Group owned by we, the taxpayers, after Uncle Sam laid out $150 billion in financial commitments. Or that The Hartford and a host of other insurance entities–almost all on the life side of the busienss, by the way–would be racing to get their hands on a thrift so that they, too, could qualify for a piece of the bailout pie.

That kind of “Can You Top This?” mentality set the tone for the NU P-C Executive Conference, with officials from top insurers, reinsurers and industry-related law and consulting firms warning about the perilous times ahead. You may read all about it on the NU Online News Service, with links to our coverage posted at the close of this blog entry.

Among the highlights:

–Speakers cited the diminishing supply and rising price of reinsurance as a prime factor in what is likely the end of the soft market. Now, that doesn't mean we're entering a hard market–at least not in the short term. But it's difficult to imagine insurers being able to afford much more price-cutting, given their horrific investment returns, soaring catastrophe losses and plummeting bottom lines.

–That said, there was still griping about AIG's commercial units supposedly keeping the soft market alive by cutting prices to maintain market share to compensate for the hit their brand reputation took due to the federal bailout of their corporate parent.

“Although most carriers are looking for robust premium growth in 2009, hope is not a business plan,” according to Robert Deutsch, chief executive officer of Ironshore. “The market can't get any better until it can't get any worse, and I don't know that we're at the bottom yet,” he added, citing AIG's market conduct as a “mitigating factor.”

“I know AIG says it is not cutting prices, but that is not what I am hearing in the market,” he added. “AIG is doing whatever it has to do to keep business.”

In a panel I moderated earlier in the day, I started off by commenting on how extraordinary I think it is to hear insurers brazenly lambasting a competitor by name for lowering prices. (I first raised this issue in my blog earlier this week. Click here to read it.)

One of my panelists–John Doyle, president and CEO of AIG Commercial Insurance–dismissed such allegations from his competition. Indeed, he said he was curious that AIG is being singled out when his companys top line was down seven percent during the third quarter, while some carriers criticizing AIG had increased their top line in that period.

–Capital access was a big concern of those at the conference, especially for opportunistic situations, like when a Bermuda carrier wants to form a property-catastrophe subsidiary overnight to capitalize on higher demand for insurance following a natural disaster. “Side cars will be sidelined for awhile, with investors such as hedge funds focused on their own cash-flow problems,” said W. Marston Becker, chairman and CEO of Max Re Capital Group.

The stranglehold on the capital markets, he added, “puts us more at risk for unforeseen events. If there is another [Hurricane] Katrina or earthquake, it will be harder to get into the market quickly as we did after past catastrophes to fill the coverage gap.”

“Since every company has less surplus, it will be very hard to reload,” agreed John Berger, president and CEO of Harbor Point Ltd. “After Katrina, it seemed like we raised enough capital to replace what was lost in about 20 minutes–people were lined up to invest in insurers. Those days are over.”

–Tort costs are heading up. Bob Hartwig, president of the Insurance Information Institute, said that with Democrats controlling the White House and Congress, look for “advocacy group representatives” to take the helm at federal agencies, such as the EPA, which could tighten regulatory oversight and raise the likelihood of tort claims. He also predicted that erosion of tort reforms could take place.

H. Elizabeth Mitchell, president and CEO of Platinum Underwriters Reinsurance, added that “the Obama administration is likely to appoint more plaintiff-friendly judges” to the federal bench. Plus a number of speakers cited the likelihood of a flood of directors and officers and errors and omissions lawsuits generated by the financial meltdown on Wall Street.

–Federal regulation is more likely as Congress looks to crack down on all financial services, with insurers unlikely to be spared, according to many of the speakers. Mr. Hartwig said property-casualty insurers must make the case to Congress that they are far better at risk management than their banking counterparts, and thus far less likely to go insolvent–and should therefore be spared any onerous regulation.

However, the concern is that the “O” in optional federal chartering might be jettisoned as Washington moves to take full control of financial services oversight. L. Charles Landgraf, a Washington specialist with conference co-sponsor (along with Ernst & Young) Dewey & LeBoeuf, reported that Sen. Chris Dodd, the Connecticut Democrat who heads up the Senate Financial Services Committee, said “we cannot have a system that encourages charter-shopping and a race to the bottom on regulation.”

Mr. Landgraf added that “anything that smacks of regulatory arbitrage is off the table. There will be no regulatory gaps between the state and federal governments.”

However, Sen. Dodd's counterpart on the House Financial Services Committee, Rep. Barney Frank, D-Mass., was reported by Mr. Landgraf to have made one key observation indicating that perhaps Uncle Sam might yet have second thoughts about taking on regulation of insurance.

“Rep. Frank said that one of the benefits of moving from the state legislature to Congress, as he had done, was never again having to field constituent complaints about homeowners and auto insurance problems,” according to Mr. Landgraf, adding that Rep. Frank “wondered aloud why Congress would bring such grief back into their lives by taking on insurance regulation.” Good point! Who needs the aggravation???

Of course, the big fear expressed, by Mr. Hartwig and others, is that we'll end up with an unworkable dual regulatory system, with Washington policing solvency, while leaving the nasty business of supervising rates, forms and market conduct with the states.

That would leave insurers having to serve two regulatory masters with conflicting priorities. Try explaining to Florida regulators why you must double your homeowner rates in Florida to satisfy federal solvency standards when the governor is campaigning on a platform of lowering such costs for voters!

What do you folks make of all this?
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To read more about the conference, click on the following stories:

–U.S. Insurance Regulation Seems Certain, Insurance Execs Say: Click here.

–AIG Exec Defends Company Amid Soft Market Discussion: Click here.

–Dont Mess Up Hard Market When It Comes, Says Munich Re Exec: Click here.

–Happy Days For Reinsurers Are A Ways Off, Expert Says: Click here.

–Banks, Not Insurers, Need Tighter U.S. Laws, Hartwig Says: Click here.