Simplification Key To Insurers' Relative Success In 2008

NEW YORK--Property-casualty insurers with simple management strategies weathered 2008 economic troubles better than carriers who branched out into other financial services sectors, industry experts said yesterday.

Speaking at the Property/Casualty Insurance Joint Industry Forum, sponsored by 16 p-c insurance trade associations, a panel of professionals in fields related to insurance said p-c insurers fared relatively well in 2008, especially compared to other financial services sectors.

The group, which included a regulator, disagreed on whether Congress will act to emplace federal regulation of insurers and offer them optional federal chartering.

Vincent J. Dowling Jr., managing partner of Dowling & Company, said the model for p-c insurance is "unbroken," whereas banks, life insurers and the real estate industry have all seen major problems with how they conduct business. P-C insurance has taken some hits, Mr. Dowling noted, but it was prepared from a capital point of view.

He said p-c insurers, unlike other financial services companies, are not highly leveraged, and have generally taken no unusual risks with their balance sheets.

Michael S. Pritula, director of McKinsey & Company, said surplus is down by a significant number, but the industry is not facing a catastrophic situation. "It was an OK 2008" for p-c insurance, he said.

Sam Friedman, editor in chief of National Underwriter, said p-c insurers have shown themselves to be among the best risk managers in financial services by sticking to a basic business plan, avoiding recklessness and standing by the risks they write. Conversely, he said, "You see how banking has handled risk."

Mr. Dowling said that, for the p-c companies he has tracked, the ones that have experienced the most trouble are those that involved themselves in financial services areas outside of p-c.

Mr. Pritula said dealing with the day-to-day challenges of p-c insurance, such as competing in certain states or markets, is a challenging task for managers.

Companies that added layers of complexity and diversions by branching out into other financial services operations had a tougher time when the economy faltered, he noted.

Heading into 2009, Mr. Dowling said the industry is in good shape. The industry is unlikely to see premium growth, he said, but it may see better relative pricing on exposures.

Companies that have kept their balance sheets strong will have a "huge advantage" because they will maintain strong ratings, according to Mr. Dowling. The rating agencies, he noted, are still "running the game."

Mr. Friedman said even though insurers will try to make up for investment losses in 2009 by raising prices, the struggling economy means that insurance exposures will go down, and so insurers may not see the impact of a hardening market on their bottom line.

Mr. Pritula said that, going forward, the economic crisis will provide an opportunity for insurers to get back to the basics of p-c insurance with respect to cost position, management and risk management.

The experts disagreed about the level of federal involvement in insurance regulation, if any, in 2009 and beyond. Noting that there have been no p-c insurance insolvencies related to the current recession, Thomas R. Sullivan, Connecticut's insurance commissioner, said state regulation has proven itself worthy. "I don't want to get stoned here, but state-based regulation works," he said.

He proclaimed the idea of an optional federal charter in any form "dead," and said any sort of optional federal regulation would be "tantamount to deregulation" and would not pass through Congress.

Mr. Pritula disagreed, and said because the full effect of the economic crisis on financial services companies is not yet known, it is too early to speak in absolutes about the future of regulation.

He said banking, for example, could be in for more trouble, and that would open room for more regulation of financial services. Once Congress starts considering regulation, he said, the question of regulating insurance could be raised.

Within two years, both Mr. Pritula and Mr. Dowling predicted there will be some sort of federal regulatory presence in insurance.

Mr. Pritula said insurers have to recognize that the circumstances surrounding American International Group will influence the federal regulation discussion, even though AIG's problems were non-state-based issues. He also said Washington recognizes the current state-based system is viewed as a trade barrier, as well as the inefficiencies in the current regulatory system.

Mr. Friedman said insurance, as of now, is not a priority in Congress, "and that is a good thing." He said Congress has a lot to deal with at the moment, and even if it wanted to consider federal chartering, the federal government is not in a position right now to create the kind of infrastructure required to implement it.