Low Interest Rates, Diminishing Reserves Will Continue to Challenge Property/Casualty Insurers in 2016, Say CEOs at Joint Industry Forum

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NEW YORK, January 19, 2016 — A panel of prominent property/casualty insurance executives forecast a challenging 2016, as the diminishing tailwinds of reserve releases struggle against headwinds of low interest rates.


The five senior executives gave their forecast and other market insights at the 20th annual Property/Casualty Joint Industry Forum, held here on January 12, in a session titled, A View from the Inside Looking Out, moderated by Robert P. Hartwig, president of the Insurance Information Institute (I.I.I.).


In recent years the industry has enjoyed steady growth—about 4 percent a year—and favorable underwriting results—a combined ratio of close to 98, noted Hartwig, who is also an economist. Panelists cautioned results could deteriorate.


Constantine P. (Dinos) Iordanou, chairman, president and chief executive officer of Arch Capital Group Ltd., said results had been buoyed by the favorable runoff of loss reserves from prior years. When actuaries change their estimates of losses incurred in previous years, it affects earnings in the current year. Industrywide, those estimates have been revised downward in recent years, but the favorable runoff is “scaling back,” with deficiencies emerging in some lines, Iordanou said. “What will carry the day is underwriting discipline and patience.”


Franklin W. (Tad) Montross, chairman and chief executive officer, General Re Corp, noted that the loss reserves re-estimates that have benefited the industry mostly came from favorable development on accident years that occurred between 2003 and 2007. “Those estimates seem unlikely to waver, and more recent accident years have been a push,” said Montross.


Montross added that the industry was very lucky in 2015, in particular with the low level of catastrophes. “Last year marked the 10th consecutive year without a Florida hurricane, the longest stretch since the 1850s,” he said. “We have been living on borrowed time.”


Several panelists noted that low interest rates have hindered investment returns, another important source of industry profits. Others remarked that rates on insurance have been flat or lower, particularly in reinsurance.


The outlook wasn’t completely grim. Peter Zaffino, president and chief executive officer, Marsh LLC, said that exposures have continued to increase and that the rate decreases have been measured, with reinsurance rates declining less in the United States than in other parts of the world.


“The lack of major catastrophes has kept reinsurance prices low, even as the risk of disasters appears to be steadily rising,” said Montross.


“We’ve never managed to price CAT business on a prospective basis,” added Stephen Catlin, executive deputy Chairman, XL Group plc. “We seem to be stuck in a rut.”


Panelists observed that companies have more capital than they strictly need to underwrite, but the excess capital isn’t making reinsurers irresponsible. Instead of bidding down business to deploy capital, companies are keeping the excess on the sidelines or returning it to investors through dividend increases, stock buybacks or mergers and acquisitions, Zaffino explained. “Insurance companies are very responsible,” he added. “Capital doesn’t get deployed if it isn’t needed.”


Alternative investors—pension funds, hedge funds and others—have entered the reinsurance market, but panelists said they did not know whether the new investors would be around for the long term. Most entered the market as bond yields fell and the industry dodged high catastrophe losses. If rates rise or catastrophes roil the marketplace, the new capital may exit.


Paul Elhert, president, Germania Insurance, believes that alternative capital will outlast the next big catastrophe, as investors realize that after a catastrophe reinsurance rates rise and profits quickly follow. “For now, Germania will take advantage of falling prices, though the business transaction is about more than dollars and cents,” he said. “We value our relationships,” he added. “We want them to be a win-win.”


Executives also responded to a series of questions on mergers and acquisitions, which topped $200 billion worldwide in 2015. Catlin, whose XL Catlin was formed by a merger last year, said he prefers organic growth, but these days mergers help reinsurers because “scale counts.” Bigger companies can spend more time helping clients, he said.


Hartwig noted that many mergers involved Asian acquirers, especially from Japan and China. He asked the panelists what was driving the interest in acquisitions.


Iordanou noted that Japanese mergers are driven by that country’s demographics. “As the Japanese population ages, there are fewer life insurance policies to be sold there,” he said. “When they are looking to find growth, they can’t find it in the auto or life business. Their alternative is to internationalize their business.”


Iordanou said that the Chinese also want to internationalize their financial services sector in an effort to acquire Western technology. “So we don’t see a lot of opportunities to work with Chinese companies. History hasn’t been good for those who have invested in China. But the Chinese will continue to expand internationally and will be looking to invest in Western assets.”


Catlin said that if you look at it from the perspective of the Asian P/C companies, it is extraordinarily difficult for them to grow organically in the West. “Practically speaking, the only way they can break into those markets is by acquisition and then hope that the acquisition they make works for them either on an integrated basis or a stand-alone basis.”


“If you look at it from a western point of view, the real growth opportunities for any of us in the next five years in dollars and cents will be in the U.S., Europe and Bermuda,” said Catlin, “because that’s where there is a large stable of companies; that is where there is greater wealth down the line. Longer term though, growth will shift to Asia and Latin America, as the middle classes in those countries will grow.”


The Forum is sponsored by: AAIS, ACORD, American Insurance Association, the Association of Bermuda Insurers and Reinsurers, The Geneva Association, Insurance Institute for Business & Home Safety, Insurance Information Institute, Insurance Institute for Highway Safety, International Insurance Society, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, National Insurance Crime Bureau, Property Casualty Insurers Association of America, Property & Liability Resource Bureau, Reinsurance Association of America, The Institutes and Verisk Analytics.


The I.I.I. has a full library of educational videos on its You Tube Channel. Information about I.I.I. mobile apps can be found here.



Insurance Information Institute, 110 William Street, New York, NY 10038; (212) 346-5500; www.iii.org

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