Posted on 30 Mar 2010
The biggest issue facing the reinsurance industry right now is how to manage the soft market, said Pina Albo, president of the reinsurance division for Munich Re America.
"Right now, we've got a lot of competition in the market on a premium base that is shrinking. We need to have the discipline to know when to write a piece of business and when to walk," Albo told BestWeek.
While capital in the reinsurance industry is almost back to the level it was before the financial crisis of 2008, "unfortunately, the environment is not one where you can take advantage of that," Albo said.
She said rates have dropped in the past few years, down 35% from all-time highs. "On top of that, we have an industry whose calendar-year results are not indicative of what the accident year is really showing. We've seen good calendar-year results, but that has been buoyed primarily by reserve releases -- the 'cheating phase' as so many people like to refer to it," Albo said.
There's few signs of hardening so far this year, outside of specific markets hit by catastrophes, such as Chile. "All predictions are that 2010 will also be a year a of decreased premium, so we have lots of surplus-rich companies fighting over a smaller pie," Albo said.
Another looming threat to the reinsurance industry is inflation. Even while the consumer price index hovers at about 2%, economic outlooks have predicted a spike in inflation resulting in part from the government pumping money into the U.S. economy through President Barack Obama's economic stimulus plan, plus the Troubled Assets Relief Program.
If inflation does rise, "we are looking at pricing inadequacy, because we certainly haven't priced for increased inflation," Albo said. She said a rise in inflation will result in losses being paid out more quickly, insurance companies breaking their retentions and reinsurance companies seeing contracts triggered earlier. "Also, the whole predictability of our reserve situation becomes a little more questionable," Albo said.
Also, the insurance industry is not just impacted by the consumer price index, but faces the additional exposures of medical inflation and tort inflation, which typically run higher than the CPI, Albo said.
The erosion of tort reform -- state supreme courts in Missouri and Georgia both issued rulings this week that softened medical professional liability tort reforms -- is also a concern, Albo said. Those reforms were "very beneficial to our industry," she said.
Munich Re is a leader in climate change research, but Albo said even skeptics who don't believe that climate change has its root in man-made causes have
Part of those increased losses stem from larger, more expensive homes being built in more exposed areas, such as along the coast.
But it's not just big catastrophes that concern the insurance industry.
Primary insurers can also see their bottom lines hit when a series of smaller events, such as tornadoes and thunderstorms, strike them with increased frequency.
To help those insurers deal with frequency risks, Munich Re has rolled out a catastrophe frequency cover that offers protection from an aggregation of smaller losses. "A number of our clients have benefited from that protection," Albo said.
On the regulatory front, the biggest issue of concern to the insurance industry is that it's bundled up with the banking industry in any new regulation.
If you compare banks to insurers, they are quite different, Albo said. "The bank's business is to take on risk and get rid of it as fast as they can. In our industry, we take the risks, we have skin in the game. We keep the risk and we like to hold on to as much as possible. It's two different games that are being played, yet there is a threat because people don't understand our industry," she said.
Albo said the industry needs to do a better job speaking up about how it's not like the banking industry.
"The p/c industry has held strong throughout the crisis, and that is something that we as an industry need to be more vocal about, Albo said.