Bank Style Regulations Would Raise Insurance Costs, Analyst Says

April 21, 2010

Bank style regulation on property/casualty insurers would lead to significant policy error, says a leading insurance industry econmist.

“Bank style regulation would needlessly raise insurance costs for hundreds of millions of insurance consumers and could unfairly require insurers to subsidize the reckless lending practices and speculative activities of failed banks,” said Dr. Robert Hartwig, an economist and president of the Insurance Information Institute (I.I.I.).

In analyzing the 2009 year-end financial results for U.S. property/casualty insurers, Hartwig highlighted the $54.2 billion, or 11.8 percent, annual increase in claims paying capacity, to $511.5 billion last year from $457.3 billion in 2008, a figure also known as policyholders’ surplus. In fact, by year-end 2009, the industry’s claims paying capacity was within two percentage points of its all-time record pre-crisis high of $521.8 billion. The key factors contributing to the resurgence in capacity in 2009 were the recovery of the U.S. capital markets and strong underwriting results—aided by a respite from high catastrophe-related losses.

These trends came in a year when net premiums written for P/C insurers dropped 3.7 percent, marking the first three-year (2007-2009) sequential decline in P/C net premiums written since the Great Depression, when net premiums written dropped for four straight years (1930-1933), according to Hartwig.

“The resilience of the property/casualty insurance industry even during times of extreme distress and volatility in the global economy and financial markets truly sets property/casualty insurers and reinsurers apart from the rest of the financial services industry,” Hartwig wrote in his analysis of the 2009 year-end figures. “At its zenith the crisis consumed approximately 16 percent of the industry’s policyholders’ surplus — more than any other “capital” event in post-Depression history, including Hurricane Katrina (13.8 percent) and the September 11 terrorist attacks (10.9 percent). Unlike most banks, however, insurers and reinsurers continued to operate normally on a global scale without any disruption to their operations.”

As Congress considers financial industry reform, which could include the imposition of taxes on large financial firms (including insurers) in order to create a fund to resolve those that fail in the future, Harwig says, P/C insurers have been arguing they were not the cause of the crisis and that the industry does not pose a systemic risk to the financial system.

“No P/C insurer failed because of the financial crisis (compared to more than 200 bank failures to date), no claim went unpaid and no policy was cancelled,” he said. “Insurers continued to compete vigorously and introduce new products throughout the crisis, whereas most banks radically scaled back their operations and product offerings.”

Regarding AIG, Hartwig said that numerous state regulatory agencies and Congressional hearings have revealed it was the company’s non-insurance Financial Products unit, not its insurance subsidiaries, which prompted the federal government’s intervention.

“The bottom line is that throughout the entirety of the financial crisis property/casualty insurers continued to provide protection to hundreds of millions of insurance buyers with absolutely no interruption to their operations,” Hartwig said. “At the same time, hundreds of banks failed, but no property/casualty insurers have done so as a result of the crisis.”

According to Hartwig, the difference in “performance between most banks and property/casualty insurers, coupled with the industry’s proven resilience as borne out by the strength of the year-end 2009 financial results, underscores the fact that subjecting property/casualty insurers to bank style regulation can only harm consumers.”

Source: III

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