NU Online News Service, Sept. 23, 9:15 a.m. EDT
The global recession has demonstrated that insurers' reliance on the capital markets to fund catastrophe risk can put them at financial risk, said the president of the Insurance Information Institute.
Robert P. Hartwig, I.I.I. president, speaking at a recent conference in Australia sponsored by Aon Benfield Australia Ltd., said the global economic crisis brought on by the U.S. subprime mortgage sector meltdown in mid-2007 "spread with remarkable speed and ferocity to challenge the operations of every segment of the global financial services industry, including insurance."
The result of the crisis was an interruption in the funding of catastrophe risk instruments, and primary and reinsurance capacity in the United States and Europe falling by 15 to 17 percent.
While not viewed as a threat to solvency, said Mr. Hartwig, the ability of the industry to attract capital after a major capital event has clearly been impacted.
Among some of the lessons from this event: capital has become scarce, alternative risk transfer may not be enough to provide sufficient capital, the expense of capital has increased, investment earnings can only offset a small share of catastrophe losses, and that government run property insurers and reinsurers are vulnerable to a financial crisis, he said.
Despite these challenges, Mr. Hartwig noted that the property-casualty industry has "emerged with their basic operating model intact." He added that the "conservative risk management philosophy" got the industry through this crisis.
"Financial crises have always posed severe challenges," said Mr. Hartwig. "The capital intensive nature of catastrophe risk funding amplifies those challenges."
In the future, he said, insurers will need to develop "secure channels" to access capital to reflect the potential for future market disruptions while "implementing new risk management measures reflecting the lessons of the current crisis and the evolving regulatory response."
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