February 12, 2007 by Canadian Underwriter
In an analysis piece, A.M. Best says it’s possible “the global insurance market will one day come to recognize 2007 as the ‘Year of the Regulator.'”
A.M. Best says recent political events in the United Kingdom and the United States are threatening to interfere with insurance pricing in free-enterprise markets.
In Europe, for example, the European Commission, spearheaded by Neelie Kroes of the Netherlands, the E.C.’s competition commissioner, recently published a 164-page report on competition in the business (commercial) insurance market.
A.M. Best notes the study found “a significant degree of market fragmentation along national lines… “
“Among the commission’s concerns are apparent differences in levels of competition among the E.U.’s member states, along with differences in pricing for large corporate clients as opposed to small and medium-size enterprises,” A.M. Best reports. “To be fair, the commission says in its report that it wants to identify and fix anything within the E.U. market that causes ‘distortions’ in competition, thus pricing.
“But that’s a difficult nettle to grasp for government, since insurers, to remain viable, must impose a variety of underwriting guidelines to make sense of the prices they assign to risks. With minimal effort, a government watchdog could label any such guideline a ‘distortion.'”
The opinion piece goes on to note that, in the United States, a judge’s decision against Allstate effectively found the insurer’s homeowner policy exclusions for flooding did not apply in the circumstances of Hurricane Katrina.
“Florida lawmakers also expanded the mandate of the state’s catastrophe pool, the government-backed reinsurer of last resort, a move that further pushes private-market reinsurers out the door,” A.M. Best noted. “Louisiana’s governor is now calling for a similar catastrophe pool in her state.”
What the U.K. and U.S. governments are looking for, says A.M. Best, is “equal outcome (everyone who suffers a loss gets compensated) for equal input (uniform premiums).”
But such a goal “subverts the very foundation of insurance,” the ratings agency notes, which is “risk coverage priced according to loss experience and compensation paid according to contract terms.”
Subvert the pricing mechanism, A.M. Best warns, and “insurers fail or flee the market, leaving government with the ultimate bill.”