Natural Catastrophe Losses Demonstrate Value Of Insurance; Also Expose Complexity And Vulnerability Of Global Supply Chains, Say CEOs

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NEW YORK, January 10, 2012 — Despite paying out billions of dollars in natural catastrophe losses in 2011, the property/casualty insurance industry continues to demonstrate its financial stability, resilience and ability to pay future claims, said chief executive officers (CEOs) participating in the View from the Inside Looking Out, a panel discussion at the 16^th annual Property/Casualty Joint Industry Forum, held here.

 

“We have a lot to be proud of as an industry in the way we performed in 2011,” said Lori Dickerson Fouché, president & CEO, Fireman’s Fund. “We weathered the financial storm that came together both in terms of the economy and the extraordinary loss year.” 

 

Shivan S. Subramaniam, chairman & CEO, FM Global, agreed: “Given all the things that have happened in the business in the last 12 months, we have done very well for our policyholders in some very bad times. Despite the more than 21 natural catastrophes worldwide, we took care of the needs of policyholders and continue to be very solvent and continue to have strong balance sheets.”

 

While 2011 was a remarkable year for catastrophes, Fouché observed that hoping for lower catastrophe losses is not a reliable strategy going into 2012. “Hope is not a strategy, as much as we would like it to be. We cannot rely on investment results,” she said, noting that insurers need to go back to basics in terms of their business. “Underwriting discipline, operational effectiveness and pricing—these are the basics of running an insurance company that we have to strengthen, to improve results.”

 

David Long, president & CEO, Liberty Mutual Group, said it was the year of non-model cats which exposed some of the strengths in the industry as well as some of the things the industry needs to work on. “It hit the fact that a number of lines of business are fundamentally underpriced. So results wouldn’t have been what you would have hoped anyway and that was masked by those non-model cats.” 

 

The panel also looked at the issue of global supply chain disruption and whether global corporations were adequately protected in terms of insurance and risk management. Many corporations were not protected, which was clearly exposed by the Japanese earthquake and tsunami and the flooding in Thailand, which may turn out to be the second or third largest event in 2011. 

 

Subramaniam said that manufacturing and most of the commercial institutions over the last decade have moved to a very high efficiency and productivity mode, which means they use supply chains and outsourcing to a great extent. “That has completely changed the nature of their risk profiles and what the events in 2011 show are that supply chains are very important.” 

 

Subramaniam said there is no way an insurance company can meet the needs of its clients for all their supply chain issues principally because people have suppliers who have suppliers, who have suppliers. “It keeps going on and doesn’t stop. That’s one of the key things we’ve learned through all of this and that insurance is only part of the solution. Commercial clients are going to have to spend more time on risk management,” he said, adding, “Supply chain losses are starting to behave like casualty losses, they have a long tail. I suspect for another 18 months we’re going to continue to hear about losses coming out of Japan.”

 

Long noted that part of the problem of supply chain is that the onus is on the business not on the insurance company to take care of it. “What we’re seeing, because we have an operation in Thailand too, we’re seeing folks relocating those plants from Thailand to Vietnam,” he said, noting that Vietnam too has its own flood problems. “We need much better data, much better analytics on aggregation of commercial risks,” he explained. “We do a pretty good job looking at low frequency, high severity storms and we model them pretty well. What we didn’t do a good job of is high frequency, relatively low severity storms, so we’re doing a lot of analytical work on that.”

 

Looking ahead to 2012, James Kennedy, president & CEO, Ohio Mutual Insurance Group, said the focus for his company was firmly on underwriting profit and investment income. He remained bullish on the opportunities for small and medium-sized mutuals to compete in the insurance marketplace. “Many of the changes we have made in the last 10 years focus on internal alignment and clarity of purpose. It’s not an issue of size and whether you are big or small, old or young.”

 

From the reinsurer’s perspective, Eric Smith, president & CEO, Swiss Re America, said that emerging markets represent an opportunity for growth, though this is not necessarily a simple task. “If you are going to play here you have to be prepared for a bumpy ride.”

 

Smith added that low interest rates were causing extreme difficulty for reinsurers. “When events occur you have to replenish capital and rely on investment results to do that, but they are not there now,” he said.

 

Moderated by Dr. Robert Hartwig, president & economist, the Insurance Information Institute (I.I.I.), the session offered insights into the ways insurance company CEOs view the operational issues and challenges facing the P/C industry in 2012 and beyond.

 

The Property/Casualty Insurance Joint Industry Forum was created to provide leaders from the widest spectrum of the industry with an opportunity to meet with each other in discussion of topics of general interest. Participants included nearly 250 representatives from property and casualty insurance and reinsurance companies and organizations.

 

The sponsoring organizations of the Forum represent a wide spectrum of insurance interests and audiences. They include: ACORD, American Insurance Association, the Association of Bermuda Insurers and Reinsurers, The Geneva Association, Insurance Institute for Business & Home Safety, Insurance Information Institute, Insurance Institute for Highway Safety, International Insurance Society, ISO, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, National Insurance Crime Bureau, Property Casualty Insurers Association of America, Property Loss Research Bureau, Reinsurance Association of America and The Institutes.