Posted on 06 Jun 2013 by Neilson
The U.S. property and casualty (P/C) insurance industry is having an increasingly tough time balancing the risks and rewards in a world where natural catastrophes, various terrorist threats, and uncertain regulatory reforms are quickly growing, said industry chief executives at Standard & Poor's Ratings Services' 29th Annual Insurance Conference.
"The level of risk in the world that companies have to face is going up--period," said Gregory C. Case, president and CEO at Aon PLC. "The industry now has to be operating on a level that's faster than the world's changing," he continued, citing the recent Boston bombing and worsening threats from cyberterrorism.
William Berkley, chairman and CEO at W.R. Berkley Corp., questions the industry's preparedness. "The level of volatility we're seeing is going to undermine the basic concept of how the insurance industry operates--be it due to global warming, earthquakes, whatever--and the industry is not equipped to deal with those kinds of events [because] it hasn't built up any of the analytics since it's all new data."
For Robert Benmosche, president and CEO at AIG, Hurricane Irene served as a critical learning lesson for what occurred during Superstorm Sandy. "Things we think are modeled, aren't modeled," he explained. "We relied on basic information and it turned out to be wrong, so when Sandy hit, we were already thinking about the 100-year flood plain." He noted that companies have to "invest huge amounts on analytics. You can't just be intuitive--you need better tools."
Of course, in the years following the 2008 financial crisis, regulatory reform remains a hot button issue for the industry. For AIG, its notice of proposed designation as a nonbank systemically important financial institution (SIFI) is at the forefront of discussions. A likely result, should it happen, is higher levels of required capital. This sparked a discussion about the clear differences between insurance companies and banks. Mr. Benmosche explained that banks behave with far tighter precision in keeping their books, and are also conforming to stricter time restraints, while insurance companies, with long liabilities and complexities, have been provided more time to report their results. He said that the Federal Reserve Bank is moving to enforce greater discipline on insurers while ensuring that, at the senior levels, those insurers are actually doing what they say they're doing.
Mr. Benmosche further explained that, after what had transpired in 2008, "it's not acceptable social policy" for the government to bail out private companies. He explained that AIG being re-designated as a nonbank SIFI would put that company at a "competitive disadvantage."
Mr. Berkley also outlined the difficulties of becoming a bank holding company subject to Fed oversight, saying that it removes management's flexibility. "You can't turn on a dime, it makes it more cumbersome to manage a business. I definitely think it's a disadvantage."
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