Final Belton Report calls for change

In its final edition, the Belton Report calls for change both within the insurance industry and from legislators to deal with the slippery slope of insurer returns. Author Ted Belton says the call of “real retirement” beckons, and in this farewell issue he says in the face of dwindling investment returns, the industry must “pay the piper” with a return to disciplined underwriting.
Commenting on insurer return on equity, which has fallen from double-digits in the mid-1990s to the 2% region last year, he says the industry can count itself lucky that there is any capital to be found. “It says something about the patience and tenacity of shareholders that low returns have not caused a major flight of capital.” Even with some improvement in underwriting results, the flagging investment market continues to pull insurer and reinsurer earnings down, along with increasing claims costs a mix Belton says is leading to continued hard market conditions. “When it became apparent that claims costs continued to rise much more rapidly than premiums and, worse still, with the industry’s life support, investments, having nose-dived, the second round of the hardening process has been most severe.”
Overcapitalization of the industry was once its plague along with too many players in the marketplace. Now, however the rate of capacity utilization has been steadily increasing. In 1999 the ratio of net premiums written to equity (or risk ratio) was 1.08:1, but by the end of the third quarter of 2002, this ratio was 1.44:1. Capacity utilization in 1999 was 43%, but rose to 57% by the end of September, 2002 (based on a normal risk ratio of 2.50:1). The industry has see capital erode on the back of investment losses, even with their emphasis on bond investments (which make up 71% of insurer portfolios, says StatsCan), with interest rates low and US$177 billion in worldwide bond defaults last year.
The solution to the industry’s current malaise is industry-wide enforcement of price discipline. However, legislative reform to, amongst other things, stop runaway tort costs, is needed, he adds. Specifically, auto insurance legislation needs to be amended to deal with health care costs gone out of control. However, Belton fears new legislation in the East which sets strict underwriting guidelines will bring additional harm to an already tender marketplace. In Newfoundland specifically, where the government also intends to allow the insurance superintendent new authorities over the Facility Association, he says “if the government insists on carry these measures into legislation or regulations, it could cause an exodus of all but provincially licensed insurers who operate only in the province.”
A host of issues continue to face the industry even in the wake of rising premiums, including asbestos, mold, corporate governance scandals, class actions, climate change, fraud, cyber risks and terrorism. As Belton says of emerging risks, “insurance is about measuring price and risk. Its enemy is the unknown. The emergence of new risks and new hazards makes pricing more of a guess than an actuarial calculation. Wrong guesses can lead to large losses.”