Will 2014 Be A Hangover Year For Insurance Industry?

2014 insurance agents

Photo from Piotr Loop

A meeting of insurance industry chief executives has left a clear message regarding the gains seen in 2013: don’t get used to it.

In a press release issued January 16 by the Insurance Information Institute (I.I.I.), many execs weighed in on what to expect for 2014, and they weren’t too optimistic.

The industry chief executives agreed at the 18th annual Property/Casualty Insurance Joint Industry Forum that a confluence of higher rates, fewer-than-normal catastrophes, and strong stock market returns seem likely to make 2013 one of the best of the past decade — a feat that will be hard to follow.


Hangover On The Horizon?

The CEOs were drawn from a cross-section of the Property/Casualty industry, and while they didn’t agree on every point, all were concerned about a soft market ahead.

With the industry’s surplus growing, most expect increasing competition for coverage terms and conditions.

Peter Hancock, CEO of AIG’s global P/C business, noted that commercial insurance buyers are enjoying above average earnings, adding that “high profits will make them more likely to self-insure in the coming year, taking business from traditional insurers.”

Panelists also agreed that the low catastrophe losses experienced in 2013 were “a good break” for the industry, but something that would be hard to replicate in the year ahead, I.I.I. stated.

Franklin Montross, General Re CEO, acknowledged two “one-in-1,000 events” — flooding in the Colorado mountains and severe hailstorms in Germany. “But those, as well as the biggest recorded typhoon in history — Super Typhoon Haiyan in the Philippines — didn’t generate large insured losses,” he said, adding that very few of the losses incurred were actually insured.

This was a problem that Transatlantic Holdings CEO and president Michael Sapnar reasoned as being due to “too few people” realizing they need insurance. In California, Sapnar noted, earthquake insurance is purchased by fewer than half of the people who actually need it. “Insurers need to find a way to sell coverage in those areas,” he said.

Results for 2013 were also held afloat by reductions of loss estimates from claims two or more years ago, continuing an ongoing trend from the past several years. However, the I.I.I. release stated, “panelists agreed that trend is ready to peter out.”


Point Of Contention

One point of contention, in an exchange between Daniel Glaser, president and CEO of reinsurance broker Marsh & McLennan Cos., and Sapnar was that of alternative sources of capital.

Glaser praised competition from insurance-linked securities, which are generally championed by hedge funds and pension managers. The bonds can default if a catastrophe strikes, but they often compete directly with reinsurers that write catastrophe business, resulting in rate reductions. Case in point, last fall, rates for catastrophe (or “Cat”) business fell 10 percent or more thanks to the competition.

“That competition works,” Glaser said, because when reinsurers were faced with competition, they become innovative. “They tailored products to client needs. Quota share treaties were available where none had been, reinstatement terms improved, coverage broadened and reinsurers wrote multi-year treaties more frequently.”

Sapnar took issue, downplaying the innovation and adding, “I’ve done that … And I’ve gotten killed for it.”

Sapnar did point out that Transatlantic wrote a three-year-deal this year, but that it was “the first in almost a decade.”

Still, he wasn’t sour on the trend. “Reinsurers help underwrite or manage many of the securities, and their emergence helps counteract the contraction in the number of reinsurers over the past 20 years,” he said, likening the Cat market to “an inverted pyramid.”

“Many insurers bought reinsurance from the same reinsurers. In essence the Cat risk was being concentrated in relatively few hands. Now, the ILS market turns the pyramid into an hourglass. Money flows to reinsurers, then gets dispersed into the capital markets.”

Ultimately, beauty is in the eye of the beholder, notes Stuart Henderson, president and CEO of Western National Insurance Group, a Midwest mutual. “As a buyer, you’ve got to love the reinsurance world currently.”


In Summary

Whether you’re bullish or bearish on the insurance industry’s 2014, one thing, for most panelists, is certain. Much will depend on the state of the economy, and that doesn’t necessarily mean that a good economy will be an asset to the industry. Panelists acknowledged that “most parts of the economy seem to be picking up, which would create more exposures for the industry to cover,” I.I.I. noted.

Catastrophe losses will continue be one of the biggest variables for seeing a repeat of 2013, but most panelists agree that the positive trend in this area is non-sustainable. However, many continue to be optimistic on insurance-linked securities and also see opportunities in undersold products, such as earthquake insurance.

2014 could be a regressive year for the gains made, but as MetLife Auto & Home president Kishore Ponnavolu pointed out: “We’ve made a very nice recovery over the past couple of years … but that only brings the economy back to where it was in 2008. So we’ve basically lost six years in the process.”

That being said, there may still be some room to grow after all.

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