Trouble in Mind for the Insurance Industry
June 2009
As a genre, the Blues continues to
ruminate in my mind as a backdrop to the world economy, our industry, and
our lives. The lyricist is unknown but the song "Trouble in Mind" has been
recorded by any number of old blues aficionados, among them Brownie McGee.
It surely fits our place in time with the first verse:
Trouble in mind, I'm blue,
But I wouldn't be blue always
For the sun's gonna shine on my back porch someday.
by Peter
M. Polstein
Now that we have had the opportunity to
review the first quarter of our domestic industry, it has provided what most
of us believed was going to be limited profits and a continued need for more
disciplined underwriting. The continued lack of any significant capital with
the exception of the government intervention by way of Troubled Asset Relief
Program (TARP), whose terms continue to be, in my mind, obtrusive and
excessive, will eventually push the domestic insurers into the need for a
serious reclamation of profits.
Governmental Intervention Spells Trouble
Unfortunately, TARP is but a dire beginning of governmental intervention,
as there are calls for a super governmental agency to oversee our industry.
In a way, I suppose you can't blame politicians for moving in that
direction, as state regulatory agencies have not handled their obligations
very well, and surely the past and continued losses from so-called exotic
instruments have provided the fuel. All of this is under the guise of a more
simplistic basis of regulation. I feel this is further from the truth, as it
is again nothing more than the broad-based intervention on every economic
front by this administration. If anyone is to guide and oversee our industry
it should be nonpoliticians with knowledge of the industry.
What is interesting in all of this economic malaise is that, for the most
part, the Bermuda insurance and reinsurance companies have weathered the
economic storm rather well. With the exception of a few, the majority of the
companies have, after taking some losses during 2008, shown reasonable
profits during the first quarter with a few being robust.
You have to wonder whether the Bermuda Monetary Authority with their
limited resources, but with professionals who understand both banking and
insurance, haven't set the benchmark. They continue to be proactive, which
included the passage of a number of bills during 2008 to shore-up capital
adequacy under a risk-based model. Further, the majority of these insurers
have provided a more disciplined underwriting posture with the knowledge
that hedge funds and other post-event capital is nil.
The European Union (EU), under its Solvency II, is making headway but
continues to argue over cross-border regulatory issues, as well as capital
adequacy. Many of the EU and non-EU insurers continue to see losses from
prior and current investments, which may well continue through the latter
part of this year. There has been some increased underwriting discipline,
but not to the degree that it appears to have a marked effect on profits.
For the most part, capacity continues not to be a problem in most covers,
although pricing in certain lines, directors and officers (D&O) liability
among them, has risen fairly steeply in certain risk categories. The overall
marketplace continues to show some signs of softness, which may well change
dramatically if the second quarter numbers are either no better than the
first or reveal a downturn.
AIG Portends More Trouble
What may sway this marketplace considerably are the continued problems of
AIG. Despite protestations to the contrary from Mr. Doyle of the Commercial
Group, which continues to attempt to both rename itself and find some basis
by which it can continue to be profitable, the fact is that its first
quarter net written was cause for some alarm. Further, given the public
statements of the CEO, Mr. Liddy, who has decided to find both a more
lucrative and certainly less entertaining pastime, is that AIG's sole
purpose in being in business is to repay the United States government.
Whether the Commercial Group will find either equity in the form of
outright sale or this interesting theory of an initial public offering (IPO)
for a percentage of the Group remains to be seen. As I have previously said,
there are not many entities—or underwriters—out there who have either the
appetite or surely the pricing to readily accept much of that risk. A full
runoff of that business would certainly have a profound effect on both the
domestic and foreign marketplace. Looking at AIG's overall financial
problem, and the lack of interest by potential buyers or investors of much
of its assets, makes the reimbursement to the government a somewhat tenuous
long-term situation. A number of its so-called jewels have been tarnished by
any number of problems or total lack of interest by the worldwide investment
community.
In the meantime, the client base continues to look for ways and
commitments from both their representatives and insurers to find
alternatives which will offer the coverage that is needed at pricing which
is reasonably consistent with the economic conditions of the risk.
The Remedy? Back to the Basics
This is an interesting challenge to both representative and underwriter.
From the broker standpoint, it goes without saying that first impressions
are usually the lasting ones. The ability to provide the marketplace with
concise, accurate, long-term risk information is crucial to assuring both
client and underwriter of a fair deal.
Submissions are again a necessity, which all too often during the past
few years, have become simply background information to pricing. The need to
study all facets of risk, in a world which has both continuous and dramatic
challengers, needs, out of necessity, more thought-provoking considerations
as to what if? I again, as I have in the past, suggest that, a watchful eye
be cast on those insurers with whom you do business, as well as the question
of limits and who is physically pricing the risk. I continue to be a
proponent of long-term deals, as long as there is equitable language for an
amicable divorce.
As this country and others continues down a somewhat slippery slope, with
a wide dispersion of economic prophets who rarely seem to agree on any
particular path toward stability, we are going to continue to live in an
industry which will only right itself by virtue of its own hand. This may
well take a much more protracted time, if our government continues to
espouse a hard left socialist mantra, fueled by the continuous use of funds
that we nor anyone else has, as well as the philosophy of governmental
intervention. This is not a political statement; it is unfortunately fact,
and a fact which will have, in both the short and long-term, a serious
effect on both the economy and our industry.
Conclusion
One of the latter verses of "Trouble in Mind" more of less puts all of
this in perspective:
I'm going down to the river,
going to take my rockin' chair,
and if the blues don't leave me,
I'll rock on away from here.
And so we shall.
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