Standard & Poor's Highlights Insurance Industry Concerns

Posted on Jun 09, 2011 by Sergio Ulloa (G+)  | Tags: United States

This week, top executives from the global insurance and reinsurance business are attending Standard & Poor's 27th Annual Insurance Conference 2011 at the New York Marriott Marquis in New York City to discuss and evaluate the various earnings challenges currently facing the industry. S&P's series of seminars have thus far revealed some interesting insights on the state of international insurance today. A snap poll conducted at the beginning of the conference found that nearly half of insurance industry executives were more worried about the prospects of the life insurance and annuity sector than of any other product segment in the business. Around a quarter of respondents further revealed that they were most concerned about the reinsurance business, which has faced exceptional losses already this year from the unprecedented frequency of natural catastrophe losses, due in particular to the earthquake and tsunami in Japan and the heavy storms hitting in the United States. More than half of the attendees, 54 percent in total, further commented that the top focus for management now would need to be their company's risk management strategy, proving much more important to respondents than other administrative issues such as retaining high-profile staff. Life insurance has remained a sector facing undue pressure by the persistently low interest rate environment. These low rates have impacted the long-term returns life insurers need to sustain their operations. Thomas Marra, chief executive for life insurer Symetra Financial Corp, told conference attendees that the threat of the low-interest rate environment continuing further for a significant length of time was what keeps him up at night. If interest rates stay low, Marra argued, "my company will have a hard time meeting our hurdles," and while Symetra Financial will work hard to improve its returns on equity, Marra admitted that "it's going to be tough if interest rates stay in this range." Insurance executives representing the property and casualty market have also identified low interest rates and reduced investment returns as key challenges facing the industry. While underwriters are ready for significant price augmentation, a broad shift in the market remains implausible with so much excess capacity left outstanding in the marketplace, Speaking at the Property/Casualty Sector seminar, David S. Cash, CEO of Endurance Specialty Holdings Ltd., described the current global P&C market as "reasonably disciplined" as individual insurers have begun to exit from business lines they are not seeing adequate rates in. However, as Michael S. McGavick, CEO of XL Group, noted "the discipline in the market is uneven." While some insurance segments are showing improvement and more appropriate pricing, McGavick remains concerned about others, such as directors & officers' liability insurance, where pricing has remained overtly competitive as underwriters hold out for the recent generous reserve returns observed from other business lines. The disparity in pricing discipline between different insurance markets, absent of macro re-evaluations, could be a long-term issue for the property and casualty industry. McGavick asserted to the seminar audience that in order to realize broad market hardening and raise rates, two significant dynamics must occur: "there must be a psychological change among underwriters [and] there must be a drain of capital." According to McGavick, the first factor is already happening. Pricing is showing gradual improvement but this shift in underwriting behavior now needs to be matched by a real capacity drain, which has not yet happened. Carl H. Linder III, co-CEO and co-president of American Financial Group Inc., confirmed that the P&C market is operating in a period of uncertainty. Insurance companies have continued to hold onto their capital reserves in fear they wouldn't prove sufficient otherwise should market conditions worsen. However, as the American economy starts to recover, claim frequency may increase, Linder explained. A major storm during the upcoming Atlantic hurricane season could drain capacity and change much of the market, but not all of it, McGavick said. Ultimately it is risks that companies prove not so attentive to that move markets substantially. Conversely, both McGavick and Linder agree that an earthquake similar to those that have rocked the Asia Pacific this year could prove to be such an event. The US earthquake insurance market, despite earthquakes being an infrequent occurrence in the country, is not effectively priced and a sizable event would more dramatically impact the pricing cycle than another summer windstorm. New US government financial regulations issued in response to the 2008 global financial crisis have also had an adverse impact on the P&C sector. The increased capital requirements imposed on all private financial institutions have hampered insurers' ability to evaluate risk in particular. McGavick complained that regulators had overreacted towards the insurance industry and that attempts to fix the banking sector could lead to to bad behavior in insurance. "Banking regulators should learn from insurance regulators, and not the other way around," McGavick added. Overall, the property and casualty insurance industry has adequate reserves today but, as Cash remarked, "right can turn wrong in a matter of 18 months." Irregardless, underwriting will remain critical to individual insurer success, particularly in a Western market where economic activity, and as a result premium generation, is downcast and where interest rates remain low. Other insurance executives at the conference, while recognizing the threat of persistent low interest rates, maintained that they were also concerned the uncertain political situation in the United States. In another seminar, Craig Mense, chief financial officer for commercial insurer CNA Financial Corp, said "When you have more uncertainty, you are clearly more conservative," adding "You have tax-policy uncertainty, you have accounting-regime uncertainty and you have regulatory uncertainty. All those things make us more cautious." James Morris, CEO of life insurer Pacific Life, surmised "there are huge problems in our country and no immediate solutions." Companies Mentioned Standard & Poor's Standard & Poor's (commonly referred to as S&P) is a business branch of publishing house McGraw-Hill. Operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial vehicles such as stocks, municipal bonds,corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard &Poor's is known for its indexes, in particular the S&P 500 index.