Posted on 16 Jun 09
This week we’re featuring Dr. Robert (Bob) Hartwig, CPCU and president of the Insurance Information Institute (I.I.I.). We spoke with Dr. Hartwig about the global financial crisis and how Property/Casualty reinsurers and insurers are faring, what distinguishes them from those in the financial services industry that have run into trouble, and his view of the future.
Annie George (AG): How has the financial crisis and global recession affected the P/C sector?
Bob Hartwig (BH): “The global financial crisis that began two years ago has had an impact on every industry, the insurance industry notwithstanding. Life insurers, reinsurers and Property/Casualty carriers have certainly been affected, but having said this, it’s quite clear that P/C insurers and reinsurers are faring much better than most financial services segments, including banks, investment banks and life insurance companies.”
AG: To what do you attribute this difference between the segments?
BH: “The principal reasons behind why P/C insurers and reinsurers have fared much better than others in the financial services sector is the way in which they manage risk. By now everyone, from Wall Street to Main Street, has noticed that P/C markets continue to operate uninterrupted. The transfer of risks from a client to an insurer and an insurer to a reinsurer continues in an orderly fashion, which translates into insurers continuing to meet their claims obligations, renewing existing policies and rolling out new products. On the other hand, banks are moving in the opposite direction; they are reducing lending, raising fees and not renewing lines of credit. People are worried about whether their bank is going to fail, if they’ll be able to make payments on their mortgages or home equity loans, etc. But there is a 180-degree difference in what is taking place in the P/C industry. People don’t have to worry about any of their insurance needs going unmet. Ultimately, the beneficiaries are the policyholders, the customers. This is a powerful statement for an industry that is so integral to the economy overall.”
Dr. Hartwig reinforces how the industry’s conservative approach has weathered what has occurred during a deep recession and market collapse. “Insurers operate predicated on the possibility that every day could be a potential doomsday,” says Dr. Hartwig. “They are accustomed to operating very conservatively due to the likelihood of an unexpected catastrophe or disaster occurring…or even a financial crisis along the lines of what transpired last year. Of course, there have been some repercussions from the financial crisis, but we have not seen in the P/C sector what has transpired in the financial services industry in general.”
AG: Let’s discuss these repercussions.
BH: “The recession means that not only is the economy not growing, but it’s actually shrinking, resulting in fewer exposures to insure. Home building has dropped by 75%, new car sales are down by more than 40%, and 7 million people have lost their jobs since the beginning of the recession, resulting in shrinking Workers Compensation payrolls. There isn’t much growth opportunity for P/C insurers other than to basically attract business from another carrier or to consider some type of merger or acquisition. Insurers are looking at a period of stagnant growth or even contraction.”
Dr. Hartwig indicates, however, that no, low or negative growth for the industry doesn’t automatically imply negative profits for insurers. “Carriers need to continue to exercise operational discipline in this environment because, in addition to shrinking growth, a significant fallout from the financial crisis has been the approximate 50% drop in P/C insurer investment earnings. Therefore, with a sustained, disciplined approach to underwriting and pricing, insurers will look to restore a risk-appropriate rate of return regardless of what happens on the investment side.”
Dr. Hartwig emphasizes that even after a market slide, higher losses, and a four-year-long soft market in Commercial Lines that has resulted in an erosion of industry capital (about 13% between mid 2007 through the end of 2008), overall the sector remains very well capitalized. “The industry is not facing any imminent danger of mass insolvencies or any other crisis in the event of a major catastrophic loss.”
When asked about Harford Financial Services and AIG, Dr. Hartwig underscores the stability of their P/C operations. “What happened with Hartford and its resulting need for TARP funding is primarily related to its life insurance operation and annuity products. For AIG it was the Financial Products Division that caused the insurer’s problems. Both these insurers’ P/C divisions are quite profitable. Straying away from their core business is what got them into trouble. The government decided it is standing behind these companies. How the landscape would have been reshaped had the government decided not to provide financial aid is unknown. Yet there aren’t any P/C companies that have specifically sought or received any type of government assistance.”
AG: Some in the industry say the market is pegged to harden, while others say we will continue with this soft market. How do you view the market?
BH: “There have been some isolated areas of a hardening market such as with Coastal Property and Professional Liability coverages, but there isn’t a widespread market hardening. From a historical standard not enough capital has been depleted from the system, therefore until this occurs or something comes along to radically alter the perception of risks, we are unlikely to experience a sharp hard market. Commercial Lines pricing is less negative than a year ago, but on average it is still in negative territory. We cannot indicate timing for a hard market but certainly if there is a significant erosion in capital or we have a natural catastrophe such as a hurricane or an unprecedented event such as a terrorist attack, the market could turn.”
AG: What about the issue of federal regulation of the industry?
BH: “The future of regulation of insurance remains murky. It’s simply too soon to tell what the insurance regulatory landscape of the future will look like. It appears right now that at a minimum we will have a systemic risk regulator, to oversee certain large financial services whose operations should they become impaired have the potential to spread through the rest of the financial services sector and into the broader economy and cause a financial collapse. It is possible we will see very large insurers at the holding company level being regulated by a systemic risk regulator, but beyond that we don’t know if a federal charter, optional or mandatory, is going to pass through Congress. Additionally, we don’t know how state regulations may change in light of a systemic risk regulator. It’s too early to tell whether the industry will be regulated at the federal or state level or a combination of the two.”
About Dr. Robert Hartwig
Since joining the I.I.I. in 1998 as an economist and becoming chief economist in 1999, Dr. Hartwig has focused his work on improving understanding of key insurance issues across all industry stakeholders including media, consumers, insurers, producers, regulators, legislators and investors.
The Insurance Information Institute’s goal is to improve public understanding of insurance -- what it does and how it works. For nearly 50 years, the I.I.I. has provided definitive insurance information, and today, the organization is recognized by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.
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