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Idea Exchange The European View
Capital, Capital, or Where Did All the Mone y Go? By Charles E. Boyle
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t least the global depression has focused people’s minds on some important issues. The Group of 20 (G20) meeting in London acknowledged the need for more capital to shore-up the world’s financial system — essentially the U.S./UK view — as well as the need for stronger regulation of the financial sector, to try and reign in the excesses that caused the problem — the European view. Across the Irish Sea in Dublin the European Insurance Forum (EIF), which concluded its proceedings the day before the G20, got underway, focused on the same issues, albeit
from an insurance industry perspective. This article focuses on what the world’s, and the insurance industry’s, leaders consider the most pressing problem — shoring-up the global financial sector. How the Credit Crisis Affects Insurance Somewhat ironically, and with some notable exceptions, the industry has by and large escaped the worst consequences of the financial meltdown. American International Group, the monoline mortgage insurers, and many life and pension groups have suffered severe losses. But the property/casualty industry — in the United States, Europe, Asia and elsewhere — has so far avoided the most dire consequences of the meltdown. At the EIF, James Vickers, chairman of Willis Re International, pointed out that “all the clever people” who saw the insurance industry as “not very exciting,” are now wondering how it managed to survive the current
needed to change for years. However, the curcrisis, while they are floundering. He said that rent capital crisis makes the message a lot the industry “had continued to “focus on what more urgent. it’s good at, while the others went ‘off piste.’” Charman puts the blame for inaction on He didn’t need to mention that strong regulathe industry itself. In his opinion, the problem tion and reserve requirements played a major isn’t with the reinsurers, but is due to primary role in preventing the industry from following insurers “commoditizing pricing.” As a result, the bankers’ excesses. That’s understood. premiums are too low, and “customers refuse The more immediate concern is how the to pay, even when the price is right.” industry can continue to avoid being sucked As a consequence, if insurance companies into the financial maelstrom, which over time cannot offer the prospect of decent investcould threaten its continued access to capital. ment returns for potential investors, how are “We’re not capitalized enough,” was the way they going to attract capital? If the primary Michael O’Halleran, executive chairman of insurers don’t “adequately price products, it Aon Benfield, put it. In other words, if the discourages investors, as they can’t make any industry needs more capital, where will it go money,” Charman said. That’s the heart of the to find it? problem, but there may be some solutions. In normal circumstances, the industry would be in relatively good shape. The reinInsurers have a ‘Window of Opportunity’ surance industry was able to handle $52.5 bilThe insurance industry doesn’t operate in a lion in property claims (according to Swiss vacuum. Companies and brokers have a recipRe) in 2008, the third worst year for natural rocal relationship with the economies in catastrophes in history. However, these are which they do business. If enterprises and not normal times. What would happen if 2009 individuals spend less, less coverage is written or 2010 were to produce similar figures? The and income drops. Therefore anything intercapital markets are in a coma. If a costl y disasnational governments can do to ameliorate the ter results in further losses — a major hurricurrent crisis ultimately helps the industry. cane for instance — the industry could find At the G20, world leaders pledged $1.1 trilthat it very difficult to replace the capital it lion to the International Monetary Fund, the needs to continue to function. World Bank and to support trade in order to “This is the first time that the [insurance] help developing economies. True, much of that market has been affected by the asset side of money had already been allocated and a signifthe balance sheet,” said AXIS Capital CEO and icant portion may never materialize. President John Charman. As a result, he Nevertheless, it should help developing counbelieves the industry, more than ever before, tries, and to some extent the will have to “get back to basics.” more developed ones, to avoid Not only can it no longer rely on ‘The industry a total collapse. Insurers and investments to make up for unbrokers doing business in derwriting losses, but it may not needs better those countries should benefit. even be able to rely on the capimanagement Spanish Prime Minister tal markets to supply capital. José Luis Zapatero said — as Charman said the industry and governreported by Reuters and perneeds to do more to modernize ment.’ haps somewhat exuberantly “from a number of different — that the G20’s decision points.” It will have to “get back “contributes to confidence ... and will fa cilito basics, because its investments are negative; tate recovery. We have set in motion the greatto set higher risk [evaluation] standards, more est concerted plan of fiscal expansion in histodiscipline and higher underwriting stanry. It is unprecedented. It reaches $5 trillion ... dards.” His prescriptions aren’t new. Many This amount will contribute in a decisive way industry leaders, particularly at Lloyd’s, have been telling their colleagues that the industry continued on page N11
N2 | INSURANCE JOURNAL-NATIONAL REGION May 18, 2009
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