Execs Credit Risk Management for Minimizing Recession’s Impact

To many, the insurance world seems to operate on its own theory of physics. And to the hundreds of high-powered industry execs who gathered on the third floor of the Waldorf-Astoria in New York earlier this year, there is a new way to explain — or, at least, describe — how it’s all working: The theory of “relativity.”

“Property casualty did quite well last year on a relative basis, given the damage to balance sheets,” said Vincent (V.J.) Dowling, managing partner of Dowling & Partners, a Connecticut-based institutional stock brokerage specializing in P/C and other lines of insurance. “I think it comes out with its model unbroken.”

To put it another way: Not as bad as the other industries hammered by recession, namely retail, automotive, Wall Street, real estate and manufacturing, to name a few battered sectors which have seen massive layoffs, losses and consolidation. So despite a year that saw the collapse of a bellwether company (AIG) and huge financial strains damaging others (The Hartford, for example), the industry actually did not perform too badly. Relatively.

Dowling was one of six speakers during the first afternoon panel of the Insurance Information Institute’s annual Joint Industry Forum, a half-day gathering featuring two panels of executives, regulators and other industry watchers who tried to distill a year’s worth of challenges into some meaningful insight to the future of the industry.
“Relative”-ity was a phrase oft-repeated.

“Surplus is down $80 billion, and while significant, it’s not catastrophic,” said Michael Pritula, a director of McKinsey & Co.’s global insurance practice. “Retail, securities (and others) are down. Relative to those other groups, this is a relative calm. It was an OK 2008, all things considered.”

For some, given the conditions, the industry’s performance in 2008 left a lot of reasons to applaud.

“We had the double whammy in 2008,” said Charles (Chuck) Kavitsky, chairman, president and CEO of Allianz of America Corp. “Between the catastrophe issues that we had to deal with as well as what was happening in the financial markets, we had a pretty significant test and the industry did great.”

Risky Business

But why did the industry do great? According to panelists, the insurance world pulled through the storms of 2008 because of its experience and insight into risk management.

“The industry has weathered the storm,” said Thomas Sullivan, commissioner of insurance in Connecticut. “(Insurers) seem to be very good risk managers.”

Pritula agreed, adding that the financial troubles faced by all insurers will create a new culture of back-to-basics risk management in a lot of companies — a move he applauded. “A crisis is a terrible thing to waste,” he joked.

Pierre L. Ozendo, CEO of the Americas Division at Swiss Re, said the P/C industry is resilient because it is conservative in its risk management and focused on a strong business model “that has been proven over hundreds of years and continues to be proven today.”

Michael S. McGavick, CEO of XL Capital Ltd. agreed. “The business model of the P/C industry remains strong, vital and proven yet again. We’re the survivor or beneficiary because we spend every moment focusing on the worst that can happen. Whenever we don’t start from there we put ourselves at risk of being the alternative outcome.”

Changes Ahead?

But Connecticut Commissioner Sullivan also credited regulation with helping to ensure the industry — which despite economic troubles saw no P/C insolvencies — handled the downturn as well as it has. “State-based regulation works. This has proven it.”

But he also said that changes in the regulatory structure of insurance could be coming. In the not too distant future, Sullivan predicted “we’ll see some systemic risk regulator in Washington.”

McKinsey’s Pritula agreed that some regulatory changes would probably place a greater oversight role in Washington, although he’s unsure of exactly what remains to be seen. Still, he said, “two years from now we will have something.”