Because AIG has been at the epicenter of the economic earthquake, many non-industry observers point to insurance as one of the villains and the industry is getting a black eye that may not be warranted. AIG's problems did not surface in its insurance operations, which remained sound, but with their dubious investment portfolio which rocked the entire organization.
Not that insurance companies mightn't have gotten in more trouble if left to their own devices, but the nature of the beast is that the industry operates in a highly regulated environment, both a blessing and a curse. In this case, more of the former.
In a recent gathering of its agency members, our partner and client Renaissance Alliance featured Robert Hartwig as a speaker. For those who don't know Bob, as president of the Insurance Information Institute, he is the foremost public spokesperson for our industry. In his detailed presentation, he outlined 6 reasons why property-casualty insurers are better risk managers than banks and should therefore better weather the storm - reasons that I paraphrase here:
- Risk management is based on underwriting discipline, pricing accuracy, and management of loss exposure
- Low leverage - insurers don't rely on borrowed money
- Conservative investment philosophy
- Strong relationship between underwriting and risk bearing
- Strict regulation by state and federal authorities - more so than banks
- More transparency to regulators and the public
That being said, just as a rising tide raises all boats, a lowering tide will affect all boats, too. One of the anticipated after-effects of the financial crisis will be an increase in regulation. Another is that the current economic downturn likely signals the bottom of a soft market. Buyers can expect a hardening of prices. Insurers depend on investment income. Currently, investment returns are going down as claim costs are going up due to inflationary pressure - that leaves only one place for prices to go.
Despite the fact that many brokers report that they see no end in sight to the current soft market, many industry insiders are predicting the onset of a hard market in the not-too-distant future. Here are a few opinions on the matter:
Market Scout: "The financial markets have experienced a meltdown, several major insurers are in serious trouble, underwriting results are slipping and investment income is anemic at best. As a result, the soft market is winding down." - see the accompanying charts.
Joe Paduda notes that although workers comp rates are still dropping, there are two major factors that presage a hardening: First: "Medical trend in the group world is approaching double digits. Historically the work comp medical trend rate has been somewhat higher than group trend." Second: "The investment market has imploded, likely driving down the value of the funds held for reserves and surplus. While most investments are in what used to be thought were 'safe' instruments, it may well be that regulators and rating agencies, newly sensitized to the potential problems with even 'safe' vehicles, will require carriers to take down the value of funds held in reserve."
During recent earnings conference calls, Evan Greenberg, chairman and CEO of ACE Limited and AXIS CEO John Charman both agreed that a hard market is in the making.
Reinsurers are predicting rising prices: "The world's No. 1 and No. 4 reinsurers, Munich Reinsurance Co. and Hannover Re Group, on Monday predicted some business lines would see price increases of 10% or more in talks over the coming weeks to renew reinsurance contracts for 2009."
Ken A. Crerar, Council of Insurance Agents & Brokers president: "We won't know until January 2008 renewals what toll the economic crisis has taken on the industry in general ... What we do know is that investment income is down dramatically, carrier profitability is being eroded, net underwriting losses are higher and combined ratios are inching up over 100. How long carriers can maintain price cuts without damage to their financial health is anybody's guess. These are very uncertain times."
OK, what can a buyer do when faced with likely price increases? Some of the same things that a homeowner does in anticipation of foul weather: Tighten things up and go back to the basics. Be aggressive about preventing all workplace injuries and about managing any injuries that do occur. Strengthen your provider relationships. Tighten up your return-to-work programs. It's our experience that when rates are low, workers comp can slip as a priority and get moved to the back burner. If it isn't there already, it's time to move workers comp back to the front burner.