Category Archives: Insurers and the Economy

Marketplace Realities

The non-life insurance sector as a whole appears to have remained relatively isolated from the direct impact of the credit crisis so far, but in the longer-term there are still several uncertainties. The latest outlook on the impact of the credit crisis on insurers comes in the first of a two-part report by Willis. In the 2009 Marketplace Realties & Risk Management Solutions: A Different Kind of Cat, Willis notes that the evidence to date suggests that non-life insurance operations have incurred relatively low exposure to the direct impacts of this credit crunch, despite the impact on some of the less traditional activities of certain insurance groups. Looking ahead, Willis says there will inevitably be some wider impact on the investment portfolios and investment returns of non-life insurers in the coming reporting seasons. In the longer-term, however, several uncertainties remain, including: the impact of current and future government intervention on the financial markets; how the insurance industry would respond to and recapitalize from a mega catastrophe or series of major losses; the extent to which the housing sector continues to deteriorate. Check out an I.I.I. report on the impact of the current financial crisis by Dr. Robert Hartwig, president of the I.I.I.  

Employee Retention and Recruitment

In tough economic times there’s always a concern that cost-efficiencies may come at the expense of a company’s customers and employees. A new Web-based survey of claim officers by Towers Perrin conducted immediately prior to the global financial crisis appears to underscore insurers’ focus on strategic, growth-related actions – including the retention of key talent and expansion into new product or service lines – rather than across-the-board staffing cuts. According to its findings, claim officer respondents identified roles such as frontline technical resources (64 percent) and middle management personnel (51 percent) as among the most difficult to staff over the next three to five years. In filling vacant positions, claim officers look for different skills and competencies – problem solving (58 percent) was seen as the top core claim operations skill for those conducting adjusting operations. In contrast, the top skill for call center operators was soft people skills (92 percent). When it comes to retaining their current employees, claim respondents said it is the mix of pay, work/life balance and career advancement/growth opportunities that will keep those employees on board. As for recruiting top-notch candidates, nearly 70 percent said employee referrals are the most effective way to secure top talent. Check out I.I.I. stats on insurance careers and employment.  

Election Round-Up

In addition to deciding America’s next President, the 2008 election included several races at the state level of importance for the insurance industry. State insurance commissioner races were decided in five states – Delaware, Montana, North Carolina, North Dakota and Washington. Other decisions closely watched were the governors’ races in six states with appointed insurance commissioners – Indiana, Missouri, New Hampshire, Utah, Vermont and West Virginia. At the Congressional level, Rep. Paul Kanjorski (D-PA), chairman of the Capital Markets and Insurance Subcommittee of the House Financial Services Committee was re-elected in Pennsylvania. For complete election results, check out Best’s Election News Web site.  

Election Impact

If you’re still undecided over which presidential candidate to vote for tomorrow, it may surprise you to learn that the party of the President has just a marginal impact on the property/casualty insurance industry’s return on equity (ROE). In an analysis of the industry’s ROE by Presidential party affiliation from 1950 to 2008, the I.I.I. has found that the overall record during those years was an ROE of 8.05 percent for Democratic and 8.02 percent for Republican Administrations. The top average industry ROEs were produced during the Carter (16.43 percent), Reagan II (15.10 percent) and G.W. Bush II (9.88 percent) Administrations. Check out the I.I.I. findings here. Don’t forget to vote!

Surplus Declining Amid Financial Crisis

The financial cushion that protects policyholders is declining. Towers Perrin has warned that the U.S. property/casualty industry’s reported surplus (a measure of claims-paying capacity or capital) could decline by as much as $80 billion or 15 percent by year-end if the stock market doesn’t recover from steep losses precipitated by the continuing financial crisis. Towers Perrin estimates that the industry’s reported statutory  surplus for the third quarter is projected to decline as much as $42 billion, or 8 percent, from the beginning of the year. Towers Perrin attributes the decline to a clash in equity and credit-related losses on insurer asset portfolios, catastrophe losses resulting from an active hurricane season and an anticipated spike in directors and officers liability (D&O) claims. I.I.I. president Dr. Robert Hartwig in  his commentary on the industry’s half-year 2008 results recently noted that U.S. policyholders’ surplus declined 2.5 percent to $505.0 billion as of June 30, 2008, from $517.9 billion at year-end 2007. A trend to monitor.

Fundamentals Sound

The p/c industry yesterday reported a 57.4 percent drop in net income after taxes to $13.9 billion in the first half of 2008, down from $32.7 billion in first half 2007. The industry’s annualized statutory rate of return on average surplus fell to 5.4 percent in first half 2008 from 13.1 percent in first half 2007. The sharp decline in profitability is partially attributable to a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the p/c industry.

Despite the deterioration in profitability, in his commentary on the results I.I.I. president Dr. Robert Hartwig says a case can be made that the p/c industry is a pillar of strength in the financial services sector. Why? Dr. Hartwig explains that insurer investment portfolios are generally conservatively managed and insurers have avoided some of the problems of the investment banks and many other financial institutions because of their superior risk management model. He goes on: “The reality is that throughout its nearly 200-year history in the United States, the p/c insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere.”

Credit Crisis Litigation

Amid the fallout from the credit crisis and the growing economic storm, it’s inevitable that litigation will follow. What started with subprime has become potentially a much bigger litigation net for enterprising attorneys. Fellow blogger Kevin LaCroix over at the D&O Diary addresses this issue in a recent posting titled “Litigation Wave Inflection Point?† In it he notes that shareholder lawsuits have already been filed against the directors and officers of some of the most prominent companies affected by recent events. He then points to additional developments that suggest a possible new wave of credit crisis lawsuits where the defendant companies are not themselves directly affected by the credit crisis fallout, but instead suffer from exposure to other companies that have been directly affected. The ultimate wildcard in all of this, according to LaCroix, is the impact that the current proposed federal bailout will have on litigation going forward. Insurers will be closely monitoring all these developments. Check out further I.I.I. information on the liability system.  

Challenges Amid the Economic Storm

If you’ve been wondering what the implications might be for insurers of the federal government’s proposed $700 billion financial bailout plan, a report presented by I.I.I. president Dr. Robert Hartwig before the Excess/Surplus Lines Claims Association focuses on this very topic. Called “The Financial Crisis & the P/C Insurance Industry: Challenges Amid the Economic Storm†, the report also includes a discussion of AIG’s $85 billion loan from the Fed, detailing the structure of the agreement. Another section gives an overview of excess and surplus lines market trends.

Hurricane Cost for Energy Insurers

Marine and energy underwriters from around the world gathered in Vancouver this week for the annual conference of the International Union of Marine Insurance (IUMI). In the wake of Hurricanes Gustav and Ike there was much to talk about. A September 15 article in Lloyd’s List by James Brewer put preliminary estimates of losses to energy insurers from the two hurricanes at up to $800 million. This was based on an estimate from the IUMI energy and offshore committee chairman that the losses might cost between 10 percent and 30 percent of the energy market’s premium volume. Total global energy insurance income for 2008 is around $2.8 billion, the article notes.

As of September 15, the Minerals Management Service (MMS) reported that 28 of the 3,800 offshore oil and gas production platforms in the Gulf of Mexico have been destroyed by Ike, and several other platforms significantly damaged. In addition, three jack-up drilling rigs were reported destroyed and one with extensive damage. On a lighter note, preliminary reports from the MMS on Hurricane Gustav indicate only minor damage to oil and gas infrastructure in the Gulf. If accurate, the losses from Gustav and Ike though substantial, pale in comparison to the $5 billion cost to energy insurers (offshore losses only)  from Hurricanes Katrina ($2 billion) and Rita ($3 billion) in 2005.  

Supporting the Economy

Given current concerns about the state of the economy, it’s a good time to review the myriad ways in which both property/casualty and life insurance contribute to state, local and national economies. The 2008 edition of the I.I.I. online publication “A Firm Foundation† shows how insurers’ support of the economy goes far beyond their core function of helping to manage risk. Yes, the insurance industry plays a vital role in helping individuals and businesses prepare for and recover from the potentially devastating effects of catastrophe, such as hurricanes or earthquakes. But insurers are also major employers, taxpayers and investors. Check out state-specific editions of A Firm Foundation for latest numbers highlighting the key role of the industry in state economies.