The fourth and final panel of the 2012 PLUS D&O symposium’s first day focused its discussion on the current claim cycle, and where the industry finds itself. The panel’s discussion was driven largely by questions from the moderator and the audience.
The consensus view, expressed at the start of the discussion, was that the market is showing signs of hardening, as a result of significant catastrophe losses in 2011 and tightening reinsurance availability. Some panelists suggested that, with price-to-book multiples currently at 1:1, valuations could start to return toward higher historical averages. Others pointed to price-to-earnings ratios and offered a cautionary note — as companies seek to increase their capital, they should continue to be aware that valuation over the business cycle is going to vary.
The panel then discussed what is likely to drive industry growth in the near term. The panel stressed that insureds are looking for companies in which they have a high degree of confidence. As the industry begins to design new products to respond to a changing regulatory environment, carriers should bear in mind that growth will be driven by informed customers who have confidence in the product they are being sold, particularly in emerging markets like Brazil. That said, growth in the industry is broadly tethered to the economy, with the result that industry growth will likely continue to trend along with growth of GDP.
Following on the theme of growth, the panel then discussed the current US interest rate environment. The panel generally agreed that the near-zero rates maintained by the Federal Reserve since 2009, and which are likely to be maintained until at least 2014, are not particularly helpful for the industry. Panelists noted that rate increases are becoming necessary because real rates of return on investments are essentially flat or negative. As rates start to rise in the future, carriers will face significant challenges as their bond-to-equity ratios deteriorate and the liability side of carrier balance sheets begins to inflate. Panelists were divided about whether a hard market will in fact emerge, as losses remain manageable, carriers continue to compete broadly for the same pool of customers, and upward pressure on premium remains correspondingly low.
Looking ahead, the panelists talked about what it would take for a true hard market to emerge, as was seen in the 1980’s. Some panelists suggested that insurer insolvencies would be needed to bring about a true hard market. Others speculated that regulatory changes and current political trends could bring one about. The panelists also suggested that underwriters should not relish the return of a hard market, because the typical drivers would be a string of catastrophic losses and the inability of carriers to spread losses across different lines of business, the latter occasioned by increased transparency in the industry and customer unwillingness to bear losses outside of the lines of coverage that they purchased.
The panel also touched on the reinsurance industry, and expressed the view that reinsurers today have less influence on carriers than they once did. The panel opined that the reason for that change is that reinsurers are simply involved in a circle of transferring risk, rather than sitting on significantly larger balance sheets than ceding carriers and having better information. The result of this state of the industry is an inability to check a hard market, should it emerge.
The panel concluded with a discussion about loss trends and reserve releases. With the business cycle apparently bottoming out, panelists suggested that balance sheets could no longer rely on reserve releases for improvement. It is an axiom of the industry that premiums follow losses, and there is reason to be optimistic that the cycle is beginning to turn, as evidenced by increased premiums following losses in workers’ compensation and property and casualty lines.
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Please join us tomorrow, as we blog live from the second day of the symposium.
