Are We Repeating the Past … Again’

In a collection of works titled The Life of Reason, the philosopher George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.” There’s now a momentous shift underway in the property and casualty insurance markets.

We’re shifting from a hard market to “something else.” I hope that something else is a period of consistency and reason. While I am by nature an optimist, I’m dubious and concerned that we may fail to remember our past.

In 2003, combined ratios dropped, terms and conditions improved, investment income increased, and industry profits rose. In short, the industry paused and congratulated itself. That was a dangerous indulgence.

In 2004, four hurricanes wreaked havoc in the Southeastern United States, 11 typhoons and a tsunami devastated Asia and investigations of our industry by state attorneys general and other insurance regulatory bodies are identifying practices that must change.

26 years without an underwriting profit
It is likely the U.S. property/casualty industry will mark its 26th year in a row without an underwriting profit. We also are far short of return on equity leadership–we are likely to continue our track record of lagging behind our diversified financial services cousins in return on equity, despite being a more volatile business.

Although there are proclamations in our industry about “discipline” and “rigor” and we hear less talk about “naïve capital” or “cash flow underwriting” when it comes to underwriting, the dangers of repeating the past are real.

I fear we are entering a period of cyclical amnesia. We are once again setting aside underwriting discipline. Recent market forecasts are projecting deteriorating terms and conditions. Are we repeating the past yet again?

Underwriting discipline is critical in the markets ahead. I also believe we as an industry need to address and minimize the following impediments to our industry’s success and stability: Double-digit medical cost increases, class action lawsuits, irrational jury awards and fraud.

Problems migrating to Europe
Be warned, the tort and medical cost hyperinflation and the excesses that are out of control in the United States are well on their way to Europe and Asia. Although many trends–good and bad–begin in America there is no way, in our global industry, that the world can be insulated and exempt from these increasing cost trends. It is as naïve as the view of Americans who believe mad cow disease is a foreign problem.

Research has shown us that middle-market property/casualty European executives are worried about reserves, insolvency, increasing tort costs and an escalation in litigation.

An increasingly calamitous world cannot sustain the growth and prosperity of its people without the insurance industry. It is not self-important to describe what we do as a critical part of the global economy, and so we must do all we can to establish more predictable cost patterns in our industry.

What is to be done?
Can we do anything about it? Absolutely. Although there are some things beyond our control, those things that are within our control demand better performance. A new generation of industry leaders will now be challenged to lead a performance renaissance for customers, investors and employees.

We must combat the challenges of runaway loss-cost inflation. It is taxation without representation when 2 percent and more of our gross domestic product goes into tort costs. Of course we believe innocent people who are harmed or injured should be compensated, but our system today is neither rational nor consistent.

We must also take into consideration that our customers and investors demand consistency from us as both insurers and reinsurers. They hate the cyclicality our industry subjects them to. Underwriters must use logic, data, consistency and reason in their practice to ensure maximum results.

Last year’s catastrophes serve as a wake up call to an industry that continually allows itself to be lulled by seemingly calm waters and favorable winds. We mustn’t allow ourselves to capsize and dip into the depths of another down cycle. I firmly believe in venerated ex-House Speaker Sam Rayburn’s declaration, “There’s no education in the second kick of a mule.”

Ron Pressman is chairman, CEO and president of GE Insurance Solutions.

Topics USA Europe Underwriting Market Property Casualty