At the National Council on Compensation Insurance's annual Issues Symposium today in Orlando, Robert P. Hartwig, president and CEO of the Insurance Information Institute, offered attendees a mixture of optimism, pessimism, and hard reality on the current and future states of the property and casualty industry.
In his presentation, "Out of the Abyss: Growth, Challenges, and Opportunities in the Post-Crisis World," Hartwig reviewed the major operating and economic challenges of the years ahead.
He opened by rhetorically asking, "Is the world becoming a riskier place? Uncertainty, risk, and fear abound, with national disasters, political upheavals, and national and global economic problems abound. Are we really crawling out of the abyss or falling into a new one?"
Citing the most topical news story—the death of Osama bin Laden—Hartwig noted that people are now asking, "Do we really need to maintain terror risk insurance?"
Despite bin Laden's death, and the fact that there have been no successful terrorist attacks in the U.S. since 9/11, Hartwig said that allowing the terrorism risk insurance program to expire at the end 2014 "would be a huge mistake. Homegrown terror risks loom larger today than in 2001."
He also noted what many other analysts have: That Bin Laden's killing, at least in the short run, could actually increase risk as Al Qaeda's sympathizers seek to avenge his death.
Hartwig reminded attendees that 9/11 remains the largest workers' compensation loss in U.S. history at $2.2 billion; it added 1.9 points to the workers' compensation combined ratio in 2001.
"We are no less vulnerable from natural disasters," Hartwig stated. "The earthquake in Japan in March will become among the most expensive in world history in terms of insured losses," topping out at an estimated $30 million. The New Zealand earthquake in February caused an estimated $10 billion in insured losses.
Hartwig further noted that while the disasters in 2010 and thus far in 2011 had significant consequences for global reinsurers, the impact was felt in an earnings capacity, not a capital capacity, and reinsurance coverage remains available.
Additionally, the disasters have had no impact on the U.S. workers' compensation market, and only marginal impact on the cost of U.S. property-catastrophe reinsurance.
Unemployment Numbers Slowly Improving
Turning to the nation's labor market and the workers' compensation industry, Hartwig said, "The depressed labor market has had a tremendous impact on the workers' compensation industry. Direct written premium in Florida was down almost 60 percent in 2005-2010. That is a stunning, stunning statistic, in my opinion."
Hartwig acknowledged that the unemployment rate is slowly drifting downward, a positive sign for everyone.
"On the positive side, we have produced two million new jobs since January 2010; we added more than 250,000 new jobs in each of the last two months," he said. "This is great music to the ears of every workers' compensation insurer in America."
Noting that job growth is happening unevenly across the states and industries, Hartwig called attention to several areas where there has been an upswing. "Professional business services, health care, and manufacturing are a few of the top industries currently adding jobs," he said.
"America's factories are beginning to hum a bit," he said. "That's certainly good news. Where we are seeing significant problems is the area of small private businesses. We saw greatly elevated levels of bankruptcies in the past several years. Usually at the end of a recession, we see new small businesses being formed. We are not seeing that yet, and it is difficult to generate new commercial premiums right now."
Hartwig advised attendees to pay particular attention to 11 industries that will be viable markets for insurance products in the next 10 years:
- Health care
- Health sciences
- Energy (traditional)
- Alternative energy
- Agriculture
- Natural resources
- Environmental
- Technology
- Light manufacturing
- Export-oriented industries
- Shipping
Hartwig called health care "overwhelmingly the largest place for opportunity, driven by demographics."
Underwriting the Risks
Moving to the underwriting arena, Hartwig said, "Personal lines, which includes workers' comp, is actually doing well. Personal lines combined ratio is expected to remain stable in 2010, while the commercial lines and reinsurance deteriorate."
In more bad news on the commercial side, Hartwig noted that commercial lines expense ratios are highly cyclical, and are estimated at 30.5 percent for 2010 versus 26.4 percent for personal lines.
Near the conclusion of his presentation, Hartwig showed the "2010 P & C Report Card" from the Heartland Institute, illustrated by a map of the U.S. shaded with grades colored from "A" to "F." "Only two states got Fs," he said. "New York, where I live, and Florida, where I am right now."
In more bad news for Florida, Hartwig reported that eight of the 18 property and casualty insurer impairments in 2009 were small Florida carriers.
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