Rebound in Claims-Paying Capacity Shows Industry Resilience

The fact that property/casualty insurers recovered more quickly and completely than virtually any other segment of the financial industry is concrete proof that subjecting insurers to bank-style regulation would constitute a significant policy error, according to I.I.I. president Dr. Robert Hartwig.

Such a move would needlessly raise insurance costs for hundreds of millions of insurance consumers and would unfairly require insurers to subsidize the reckless lending practices and speculative activities of failed banks, he added.

Commenting  on the industry’s first quarter 2010 financial results, Dr. Hartwig said the rebound in the industry’s claims paying capacity (otherwise known as policyholder surplus) was perhaps the most extraordinary sign of the P/C industry’s resilience over the past year.

Dr. Hartwig noted that policyholders’ surplus increased by $29.2 billion, or 5.7 percent, to $540.7 billion during the quarter, up from $511.5 billion at the end of 2009, although after adjusting for a unique transaction the figure stands at $518.2 billion. He wrote:

The bottom line is that P/C insurance industry capacity is within 1 percent of its all time record high just one year after reaching its crisis low even after excluding the impact of the unique transaction noted previously.

Given increased market volatility in the second quarter of 2010, including a substantial drop in major stock market indices, the pace of growth in policyholders’ surplus will likely be more subdued in the second quarter. The bottom line, however, is that the industry is extremely well capitalized.†

Dr. Hartwig added that from a public policy perspective, the rapid and effectively complete recovery in capacity could not come at a more propitious moment. Congress continues to consider financial industry reform, which could include the imposition of taxes on large financial firms (including insurers) in order to create a fund to resolve those that fail in the future.

However, P/C insurers have been arguing vociferously that they were not the cause of the crisis and that the industry does not pose a systemic risk to the financial system. Dr. Hartwig noted:

No P/C insurer failed because of the financial crisis (compared to 250 bank failures to date), no claim went unpaid and no policy was cancelled. Insurers continued to compete vigorously and introduce new products throughout the crisis whereas most banks radically scaled back their operations and product offerings.†

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