Property and casualty insurers in the United States can expect a challenging 2016, speakers said at the recent 20th annual Property/Casualty Joint Industry Forum, as the diminishing tailwinds of reserve releases struggle against headwinds of low interest rates.
Panel members – five senior executives who provided their forecasts and other market insights – pointed out that the U.S. industry’s steady growth in recent years – about 4% annually – and favourable underwriting results could diminish, notes a statement Tuesday from the Insurance Information Institute (I.I.I.).
III president Robert Hartwig – who moderated the panel discussion – reported that the growth and underwriting results made for a combined ratio of close to 98 for the U.S. p&c industry.
But results had been buoyed by the favourable run-off of loss reserves from prior years, panel member Constantine Iordanou, chairman, president and CEO of Arch Capital Group Ltd., told session attendees. “When actuaries change their estimates of losses incurred in previous years, it affects earnings in the current year,” Iordanou said in the III statement, adding that the favourable run-off is “scaling back,” with deficiencies emerging in some lines.
“What will carry the day,” he emphasized, “is underwriting discipline and patience.”
Several panelists noted that low interest rates have hindered investment returns, another important source of industry profits.
Franklin Montross, chairman and CEO of General Re Corp., suggested that the p&c 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,” Montross told attendees, but further noted that the industry has “been living on borrowed time.”
“The lack of major catastrophes has kept reinsurance prices low, even as the risk of disasters appears to be steadily rising,” he said.
Peter Zaffino, president and CEO of Marsh LLC, explained, however, “that exposures have continued to increase and that the rate decreases have been measured, with reinsurance rates declining less in the U.S. than in other parts of the world,” notes the III statement.
Zaffino explained that while companies have more capital than they strictly need to underwrite, reinsurers are not bidding down business to deploy capital, but rather keeping the excess on the sidelines or returning it to investors through dividend increases, stock buybacks or mergers and acquisitions.
While alternative investors have entered the reinsurance market, panelists were unsure as to whether or not they 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,” notes the III press release.
Paul Elhert, president of Germania Insurance, is not so sure. Elhert said that he believes alternative capital will outlast the next big catastrophe, as investors realize that after a catastrophe, reinsurance rates rise and profits quickly follow.
As for mergers and acquisitions, Stephen Catlin, executive deputy chairman of XL Group plc. – XL Catlin was formed by a merger last year – said although he prefers organic growth, mergers help reinsurers because “scale counts” and larger companies can spend more time helping clients, III reports.
Hartwig commented that many mergers have involved Asian acquirers, especially from Japan and China. Iordanou’s view was that Japanese mergers are driven by the country’s demographics, including an aging population. Unable to find growth in the auto or life business, “their alternative is to internationalize their business,” he said.
As for the Chinese, they also want to internationalize their financial services sector in an effort to acquire Western technology, Iordanou suggested.
Practically speaking, Catlin explained, the only way Asian p&c companies can break into Western 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.”
For companies in the West, “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,” he predicted. “Longer term, though, growth will shift to Asia and Latin America, as the middle classes in those countries will grow.”