NU Online News Service, March 11, 1:31 p.m. EST
Liberty Mutual Chief Executive Officer Edmund F. Kelly, said he takes a "bearish" view of the future of the economy with his biggest concern being inflation, which he sees as almost inevitable in a few years.
Mr. Kelly, who is also Liberty president, made his remarks as the keynote speaker at the 29th International Risk Management Institute's Construction Risk Conference.
His talk addressed the outlook for the insurance industry and key tactics for insurers, agents, and brokers who focus on the construction industry to survive and prosper in the coming years.
The industry is particularly troubled by the overhang of the commercial property market which has implications for the future of commercial construction, he said.
Mr. Kelly remarked that in his view the nation has papered over the assets of the financial system.
To prepare for inflation, Mr. Kelly said companies need first to get their balance sheets in order, which means reserves are adequate, particularly reserves heavily influenced by inflation such as those for workers compensation claims.
Secondly, on the asset side of the balance sheet heavy investments in energy, technology, minerals, etc. will be a long term hedge against inflation, he advised.
Further on Mr. Kelly outlined the company's approach to risk management in the p&c business. Analyzing, estimating and understanding one's own risk and exposure.
Insurance companies that have gotten into trouble, he said, where those that took risks that they did not understand adequately.
He commented that banks have used a different form of risk management, "They have operated in risk-profit-paradigm of 'take more risk, get more profit,'" he said.
For insurers Mr. Kelly said, "What would materially impact our capital, would put us out of business. We identify sources of losses, reduce those sources and where we cannot, we buy sufficient reinsurance."
He continued, "First we aggressively manage our risk exposures. Secondly, we tightly manage our credit risk". Credit risk is the most significant risk for an insurance company, not catastrophes, Mr. Kelly added.
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