Times Are Tough, But They Could Be Worse!

The mood was not so much somber as shell-shocked at yesterdays Property-Casualty Insurance Joint Industry Forum, as you might expect in the midst of the worst financial crisis since The Great Depression, with no turnaround in sight. But all things considered, things could be a lot worse for insurers, and they know it.

I got the sense that those in attendance at what I consider the industrys annual family reunion were just happy to still be in business and employed, given the massive hits to their bottom lines from catastrophe losses and investment implosions.

Speakers at the event tried to rally the troops–not with false hopes of a quick recovery, but with justifiable pride that insurers were better prepared to ride out the financial storm than their banking and securities peers.

As one of the outside experts on the opening panel, I got the ball rolling by noting that while American International Group is a poster child for the bailout generation, it was AIG's unregulated Financial Products division, not their state-regulated insurance units, that got the company into trouble and prompted Uncle Sams intervention.

One speaker after another emphasized a similar themethat when all is said and done, insurers as risk managers are looking pretty good right now. They stand behind the products they write, and even if they buy reinsurance to spread their exposure, ultimately they are on the hook for any losses that occur, and must have the capital to account for it.

Compare insurers to bankers, who packaged irresponsibly-underwritten home loans into toxic securities, and passed them off to investors who didnt bother to look at what they were getting into, and who naively thought they had hedged their bets by purchasing magical credit default swaps.

New York Insurance Superintendent Eric Dinallo, in an address to the group, said insurers (and their regulators) should give ourselves a little pat on the back for the stability the property-casualty sector was able to maintain amid historic financial instability.

It comes down to the fact that at any given moment, p-c insurers must put up or shut up when a massive loss occurs, required to keep enough liquid capital on hand to pay claims, he noted.

Mr. Dinallo called credit default swaps a catastrophic enabler, marveling at how supposedly sophisticated investors thought they had insurance that turned out to be nothing like insurance at all, with no capitalization required, all in the name of innovative securitization.

We modernized ourselves right back into the Ice Age, he said. (For more on Mr. Dinallos talk about federal regulation and the resurrection of the New York Insurance Exchange, click here.)

Meanwhile, Pierre Ozendo, chairman and chief executive officer of Swiss Re America Corp., was cautiously optimistic during the CEO panel. However, while he said that the worst is probably behind us, he warned about “one caveatunemployment, calling ongoing, massive job losses a systemic risk that could seriously undermine insurance industry profitability in the years ahead.

We all must hope the promised stimulus package [being put together by Congress and the Obama administration transition team] is effective in creating jobs, he said. Amen!

Many complained about countervailing forces hamstringing insurers in their quest to boost their top- and bottom lines by finally raising prices after a long and deep soft market.

With the recession forcing businesses to contract or go bust, insurable exposures are falling, taking the wind out of the hardening markets sails. (For more about this, see my Jan. 12 blog entry about MMC CEO Brian Duperraults take on the invisible hard market.)

There was little humor at this years grim forum, but panelist Mike McGavick, formerly of Safeco and now CEO of XL Capital, got off the best joke of the day.

After some talk about product innovation to cover green construction, housing and cars, he noted that looking out at the audience he saw all familiar faces, although many were now with different companies.

This industry at least appears to be good at recycling, he observed.