Regulatory Reform, Rewards for Quality Insurers Ahead, Says Chubb Exec

Skepticism over the financial condition of insurance companies is healthy and financially strong insurers stand to gain over weaker competitors in today's market, an executive for a major property/casualty insurer told a group of underwriters.

That message came with a warning that changes in the regulation of the insurance industry are inevitable.

John Degnan, vice chairman and chief operating officer for Chubb Insurance, gave attendees at the Inland Marine Underwriters Association (IMUA) meeting in Tucson his assessment of where he believes the industry stands today.

Degnan said that 2008 was an unprecedented year that spawned an uncertain insurance market. He pointed to three factors: profitability declined dramatically due to catastrophe losses; unprecedented investment losses impacted companies' balance sheets; and surplus levels dropped significantly.

Degnan said that there has been a flight to quality by insurance customers.

"The present economic conditions will ultimately help financially strong insurers offset the decline in business. There will be additional growth opportunities arising from the weakened condition of some insurance companies," he said.

He told the IMUA attendees to acknowledge the challenges that their customers face. "They are seeking stability and predictability in face of financial uncertainty. Help them understand costs and exposures that demand pricing to exposure," he said.

Degnan said he is confident that customers will pay more for balance sheet strength than in years past.

In defense of the insurance industry, he noted that unlike their financial market counterparts, insurers operate without the significant leverage allowed for banks or Wall Street firms. An individual insurance company's financial posture is tied to its reserve strength, asset base and underwriting philosophy, he said.

He told the industry to be prepared for regulatory change because state regulatory regimes are fragmented and ill prepared to close gaps in regulation. "What the industry needs now is regulatory efficiency," he said.

"Deregulation has been deemed an underlying cause of the current economic crisis. As a result, modernization of the insurance regulatory mechanisms is inevitable," he said.

He said the insurance industry is largely insulated from the current financial crisis because it is generally low-leverage. "It has lower asset to exposure ratios compared to other financial institutions, and it has more predictable cost outflows," he stated.

By regulatory efficiency, Degan explained that he means coordinated, more sophisticated analysis of market trends; the ability to deal with systemic risk before a crisis develops; and an integrated insurance voice that can respond to the global financial crisis.

"The challenge will be to avoid duplicative and inefficient regulation," he said.

IMUA is the national association for the commercial inland marine insurance industry.