Washington
Out of all the economic problems facing insurers and their agents these days–with layoffs mounting, businesses closing and investment income deteriorating–the prospect of runaway inflation spurred by massive government spending is the biggest long-term threat, top CEOs warned during a panel here in the nation's capital.
Ted Kelly, chair, president and chief executive officer of Liberty Mutual, led the brigade of carriers warning about the fallout from the Obama administration's massive economic stimulus package and soaring federal deficits.
Speaking on a panel during the closing general session at the Independent Insurance Agents and Brokers of America annual Legislative Conference and Convention, he said he fears that the government's propensity to "print money" to save the economy will lead to inflation, which will eat away at underwriting earnings.
"Inflation is a far worse situation for us," he said, predicting that "we will need another [Ronald] Reagan and [Paul] Volker to come in" to end the inflationary spiral. (Mr. Volker, a former head of the Federal Reserve known for policies that contained inflation in the 1980s, is a close economic advisor to President Barack Obama.)
"I'm more worried about inflation than anything else," agreed Bob Restrepo, chair and CEO of State Auto. But he said the primary driver for his company's earnings remained the weather. With mounting catastrophe losses and the need to restore margins, he said his company, at least, may begin to look at lightening its load on property exposures county by county. "We are preparing for a long, long recovery."
Mike McGavick, CEO of XL Capital, said no one expected to see the current economic problems that the country is now facing. (Mr. McGavick stood in for Ramani Ayer, CEO of The Hartford, who cancelled his appearance with an earnings report coming out showing a $1.2 billion first-quarter loss and his property-casualty company reportedly being shopped.)
The economy is "bounding along the bottom" but is seeing slow improvement, according to Mr. McGavick, who also predicted that inflation would be the new economic crisis within the next few years.
Glenn Renwick, president and CEO of Progressive, said as the government moves forward, it needs to avoid "upending good businesses" and make future regulatory reforms simple and understandable. "A lot of complexity will not help," he said.
Mr. McGavick noted that carrier earnings are under tremendous pressure from losses in underwriting, coupled with plummeting investment earnings. The situation is even worse for agents being hit "from both ends"–by the soft market, and by customers reducing their purchase of insurance to save money, he added.
Customers are shopping more for insurance, said Mr. Renwick, getting additional information on companies before making their purchase.
On pricing, Mr. Kelly said the Midwest is in "price denial" because of increased losses. Over the next couple of years, property policyholders will begin to see large increases because that part of the country has not been profitable for the past five years, he added.
When asked by panel moderator Bob Rusbuldt, IIABA's president and CEO, for their opinion of the Trouble Asset Relief Program, which has been bailing out banks and American International Group, Mr. Kelly said TARP is bad for the health of capitalism. Companies that fail, he said, should be liquidated and not saved by the government. "Capitalism without failure is like religion without sin–it doesn't work," he said.
Mr. Kelly also called on the federal government to "step back" and allow free markets to work, rather than "running roughshod" over management and forcing CEOs to resign.
That point was echoed by Mr. McGavick, who said the government's increasing involvement and investment in AIG underscores the need for Washington to stay out of private business decisions.
He blamed New York's attorney general at the time, Eliot Spitzer, for pressuring AIG to oust its legendary CEO, Maurice "Hank" Greenberg, in 2005 in the midst of an accounting scandal–a decision he said should have been left in the hands of the board of directors. Noting that Mr. Greenberg has never been indicted for any wrongdoing, he suggested that had he remained in control of the company, AIG would not be where it is today.
On regulatory reform, the panelists said they are concerned about federal regulation if handled badly, or if it overlaps state mandates. "Our voices are loud and clear. Don't fix what works, and that is what we need to be concerned with right now," said Mr. McGavick.
Mr. Kelly predicted federal regulation would cover commercial insurance, leaving personal lines to the states.
Mr. Renwick said state governments need to stop regulating rates and allow the market to make those determinations.
Along those lines, "[Florida] is the poster child for what is wrong" when politics enter the insurance marketplace, according to Mr. Restrepo. The CEOs indicated there is plenty of capacity available for Florida property risks, but the problem has become a political one, with Mr. Kelly saying the state should allow the market to determine coverage prices for high-value homes and subsidize lower-wage earners.
In an interview with National Underwriter after the panel, IIABA's Mr. Rusbuldt said he believes the industry is going through a transitional phase where companies will be looking for producers to bring more good business to them.
He said he believes carriers will be looking for more profitable business from their agents with margins so tightly squeezed, and will be less concerned with business volume.
The future of independent agents and their companies have become more intertwined than in the past, he said, warning that the notion of "every man for himself" will not work anymore.
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