Risk Management

Piles of Cash Could Mean Cheap Insurance Prices

Surprisingly, property-casualty carriers have more capital on hand to support their earnings performance.
David KatzJune 10, 2013

Finance executives and corporate risk managers might want to take a flier on buying more insurance for their companies. That’s because the property-casualty insurance industry is sitting on mountains of cash that could be used to support cheaper prices, a recent Conning report on the insurance industry’s loss reserves suggest.

“If I’m an employer, I don’t want to go aggressively into self-insurance,” says Stephan Christiansen, managing director at Conning, a firm that manages insurance-company investments.

For the near term, commercial-insurance buyers might find decent coverage at lower premiums than they expect from an industry facing low returns in the capital markets and increased risk at the hands of Mother Nature, he told CFO.  

The property-casualty industry’s loss reserves (liquid assets insurers must hold to satisfy claims from existing insurance policies and other outstanding liabilities) are “stable, perhaps even slightly improved in 2012 when compared to our previous annual analyses,” according to the report.

That improvement surprised Conning analysts since it came on the heels of added reserve releases in 2012. (In the insurance industry, carriers can free up reserves if they sell more policies and/or their anticipated losses decrease. Then the insurers can report the freed-up capital as earnings.)

The industry released more than $10.5 billion in reserves in 2012, based on preliminary data used for the Conning analysis. Analysts looked at A.M. Best data representing 80 percent to 85 percent of the loss reserves of eight lines of property-casualty insurance, according to Christiansen.   

Excluding reserve strengthening in the financial and mortgage guaranty lines ($1.1 billion), the industry released more than$11.6 billion in reserves in covered lines in 2012 from years 2011 and prior, representing more than 2 percent of reserves or 2.7 percent of premium in 2012, according to the report.

Despite those releases, the reserves have gotten surprisingly stronger. Christiansen said he had thought the insurance industry had hit bottom in terms of the amount of extra money it had to play with. If it had, insurers would have had to charge more for coverage in order to boost earnings.

“The industry has been releasing the reserves to the point where Conning felt there was not much left. But lo and behold, 2012 equaled 2011. It surprised us,” he said.

How did the insurance industry end up with better-than-expected reserves? One reason has been that although insurers’ capital-markets investment returns have been low, they have been able to match the nadir by increasing premiums, according to the analyst.

The second reason for the steadiness of the industry’s reserves has been decreases in the number of insurance claims and a slowdown in employers’ handling of them, according to Christiansen. With the onset of the recession in 2008 and 2009, “loss patterns changed a bit,” he said.

“Slower economic activity means that fewer people are making claims or making claims for less. In terms of workers’ compensation, workers have been concerned about holding their jobs,” Christiansen added.

Further, employers, which have been sitting on lots of cash themselves, are using some of it to self-insure their risks. In such instances, employers retain control over how claims are administered and may be “slowing the handling of claims when they’re small,” he said.

In a market in which premiums are clearly rising, the virtues of self-insurance stand out. Asks Christiansen: “Why pay premiums if you can control costs by insuring risks yourself?”

Based on the evidence provided by the industry’s reserves, however, the market appears to be favorable to employers. Would retaining more risk and buying less coverage be a good strategy for the next year or two? “Right now, it doesn’t feel like that,” he says.