It Could Be Worse

The mood was not so much somber as shell-shocked at last week's Property-Casualty Insurance Joint Industry Forum, as you might expect in the midst of the worst financial crisis since The Great Depression. But all things considered, the situation could be a lot worse for insurers, and they know it.

I got the sense that those attending what I consider to be the industry's annual family reunion were just happy to still be in business and employed, given the massive hits to their investment portfolios.

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 noted that while American International Group may be the poster child for the bailout generation, it was their Financial Products division, not their state-regulated insurance units that got the company into trouble and prompted Uncle Sam's intervention.

One speaker after another emphasized a similar theme–that when all is said and done, insurers as risk managers are looking pretty good right now. They stand behind the products they write. 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 didn't 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 a dinner address to the group, suggested that insurers (and their regulators) “give ourselves a little pat on the back” for the stability the p-c sector was able to maintain. “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 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.

Pierre Ozendo, chairman and chief executive officer of Swiss Re America Corp., was cautiously optimistic during the CEO panel. However, while he said “the worst is probably behind us,” he cited “one caveat–unemployment,” calling the ongoing, massive loss of jobs across the economy 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!

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

After some talk about product innovation to cover green construction, housing and cars, he looked out at the audience and noted how many familiar faces he saw–although many were with different companies. “This industry at least appears to be good at recycling,” he observed.