Property/Casualty Insurers Show Resiliency In Midst Of Finan

In a general session, Dr. Hartwig noted that while the P/C insurance industry will be smaller in scale in the post-financial catastrophe world, it will emerge with its risk management model more intact than most other financial service segments.

“The P/C industry will have shrunk by about 3 percent in dollar terms and by 8 percent on an inflation-adjusted basis from 2007 to 2009 due to various factors such as falling prices and weak exposure growth.

“However, insurers are in a better position than banks and many other segments of the economy due to their superior risk management practices. The benefits of risk-based underwriting, pricing and low leverage are clear,” he said.

Dr. Hartwig noted that insurance markets – unlike banking – are operating normally. “The basic function of insurance – the orderly transfer of risk from client to insurer – continues uninterrupted. This allows insurers to continue to pay claims, sell and renew policies, and develop new products,” he said.

Hartwig predicted that P/C insurers, profitable before and during the financial crisis, will remain profitable after the crisis. Despite the financial crisis and deep recession, the industry reported $2.4 billion in net income after taxes in 2008.

“Nonetheless, this was a decline of 96.2 percent from the $62.5 billion in net income after taxes that P/C insurers reported in 2007, due partly to the poor investment environment and higher losses,” he said.

Long-term loss of investment return is one of the key threats facing insurers in the next five to eight years, according to Dr. Hartwig. “Many insurers have not adjusted to the new investment paradigm of a sustained period of low investment gains.

The industry must be prepared to operate in an environment with investment earnings accounting for a smaller fraction of profits,” he noted.

Erosion of capital is another concern for the P/C industry with capital becoming much more scarce and expensive. Though still adequate, the existing U.S. P/C capital base shrank by an estimated 12.7 percent to $455.6 billion as of year-end 2008 from its third quarter 2007 peak of $521.8 billion. “Capital and assets could fall much farther and faster than many believe. It will take years to return to the 2007 peaks as the speed with which any given amount of capital can be raised has slowed,” he said.

Mega-catastrophe losses are another key threat facing P/C insurers. Dr. Hartwig observed that insurers were hit with $26 billion in insured catastrophe losses in 2008 – the fourth highest total ever. “2008 catastrophe losses exceeded 2006 and 2007 combined. 2005 was by far the worst year ever for insured catastrophe losses, but the worst has yet to come. The $100 billion CAT year is not improbable over the next five to eight years,” he said.

In this challenging operating environment, he suggested that insurers will return to their underwriting roots. “Facing the same or higher expected losses, insurers must work harder to match risk to price. This implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years,” he added.

On a more positive note, Dr. Hartwig believed there were hopeful signs that the economy will soon begin to recover. “The recession appears to be bottoming out. The pace of GDP shrinkage is beginning to diminish and the pace of job losses is leveling off. The financial sector also appears to be stabilizing while the housing sector is likely to find the bottom soon,” he said.

The Casualty Actuarial Society is an organization dedicated to the advancement of the body of knowledge of actuarial science applied to property, casualty and similar risk exposures. The primary goal of the Casualty Actuarial Society is to provide education and research to help its over 5,000 members be the leading experts in the evaluation of hazard risk and the integration of hazard risk with strategic, financial and operational risk.