Risk Management

Special Report: Insurance at Risk

Despite the obvious advantages of huge surpluses, they have a big downside for property-casualty insurers: complacency.
David KatzMarch 23, 2016

The property-casualty insurance industry is sitting on a ton of surplus capital. From most perspectives, it’s hard to see that as a negative. For one thing, it is protection against the effects of a severe economic downturn on the industry; for another, a healthy industry can attract equity and bond investors, driving up share prices; for a third, surpluses enable insurers to offer cheap prices and innovative coverages to corporate America.

Global protection

But there are downsides to an overabundance of capital. It can for example, lead to complacency and, in some cases, careless underwriting decisions. In this Special Report’s lead story, “Hot Topic: Climate Change and Insurance,” David McCann reports that the industry has piled up so much surplus that even dire forecasts about future climate-change-driven catastrophes don’t faze it.

For its part, the P/C insurance business is, of necessity, focused on recent past meteorological experience, which isn’t half-bad. Noting that it’s been a decade since a hurricane last made landfall in Florida, Bob Hartwig, president of the Insurance Information Institute, tells McCann that “the amount of capital available to insure against natural perils has never in history been as great as it is today.” In the long term, however, the lack of prevention of the effects of natural disasters may lead to greater losses, climate scientists warn.

Besides the huge policyholder surpluses of traditional insurers, alternative investors such as hedge funds, sovereign wealth funds, pensions, and mutual funds are putting money behind their own insurance underwriting endeavors. The increased supply of capital is boosting competition among insurers, producing a P/C insurance market that may offer lower prices and more coverage availability for commercial insurance buyers.

The increasing insurance market competition, in turn, is prompting insurers like AIG’s commercial division to distinguish themselves from carriers that are mere “capital providers,” in the words of the unit’s CEO, Rob Schimek, the subject of an in-depth interview. Instead of just providing capital, the AIG division wants to focus on helping to assess and manage the risks of its corporate clients — partly by putting large numbers of engineers to work in gauging customers’ safety risks.

Besides fostering intense competition among insurers, the industry’s big surpluses have another downside, writes author Rick Gorvett.  “While the industry is in a strong position to pay claims, it’s tougher, in a competitive environment, to achieve [return on equity] targets,” he contends.