S&P Experts See Latest Pricing Downturn as ‘Something Different’

June 4, 2007

Experts say market conditions in the property/casualty insurance and reinsurance sector indicate the hard market, however short, is now over, and the industry is witnessing the beginning of the pricing cycle’s downside.

But these same experts say this downside may be different.

At Standard & Poor’s insurance conference in New York City, speakers focused on the theme, “In Pursuit of Sustainable Earnings” and on the strategies that companies in all sectors of the insurance industry are employing to sustain current profitability levels.

“Unlike other pricing cycles, which have been deep and long on the downside, we may experience something different this time around,” said Standard & Poor’s Managing Director Grace Osborne in her opening remarks. “Our reason for this cautious optimism is our overall view that as enterprise risk management is playing an increasing role at insurance and reinsurance companies, financial discipline will have a larger role this time.”

According to Osborne, the marketplace is already seeing signs of an orderly exit of capacity from the market, in deference to traditional players that have a longer-term threshold for risk/return rewards.

“On the life insurance and reinsurance side, we are concerned about the apparent need for aggressive product design to compete for shelf space, as a sizable share of distribution is no longer owned by the insurance sector,” said Osborne.

“In addition, large retirement dollars are clearly in play at ever-increasing levels as the baby boomers age into their retirement years. The life insurance sector is competing for a share of the business,” she added. “Inherent risk will creep into product design, and only those with well-entrenched enterprise risk management practices will ultimately survive and benefit.”

Osborne also commented on the capital markets, which swooped into the insurance industry in a meaningful way after Hurricane Katrina and offered sorely needed capacity.

“It is hard to deny that profits from hardening rates seeped out of the traditional insurance/reinsurance sectors and didn’t fully replenish the losses of the industry as a whole,” she said.

Since the life, property/casualty, and reinsurance sectors face unique challenges, Standard & Poor’s has scheduled separate conference sessions to address their specific issues and credit implications. Measurement and management of underwriting and investment risks, portfolio management of natural-peril and man-made catastrophic risks, use of insurance-linked capital-market solutions, and Standard & Poor’s criteria development are some of the key issues being discussed.

“Insurance 2007: In Pursuit of Sustainable Earnings,” is being held at the Grand Hyatt Hotel in New York City from June 3-5.

More information is available at www.events.standardandpoors.com/insurance.

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