Insurance At Edge of Storm, U.K. Runoff Specialists Told

Robert O'Connor
Best Wire Services
February 26, 2009

(BestWire Services Via Acquire Media NewsEdge) The global economic crisis has put the insurance sector at the edge of the storm, placing insurers of financial institutions at risk, according to Peter Greaves, a partner at consultants PricewaterhouseCoopers.

Speaking at the 2009 Congress of ARC, the U.K. runoff trade group, Greaves asked, "Should we have seen this coming? He noted that Alistair Darling, the U.K. chancellor of the exchequer, was accused of undermining confidence when he issued a warning in August 2008 about the likely severity of the downturn.

What has now proved to a prophetic statement was roundly criticized, Greaves told a seminar. The conference, held at the ornate Merchant Taylors Hall near the Bank of England, was titled After the Deluge-Riding Out Choppy Seas. Greaves pointed to the central role of property in the crisis, with both housing and construction having been badly affected.

If the edge of the storm is to be hit more severely in three to six months, I don't know, Greaves said, noting that the insurance sector has had a good buffeting already. It's taken a bit of a battering. Deeply troubled stock markets, where premiums had previously been invested, have lost liquidity, Greaves said. Lenders do not want to lend, he added: It basically ends up with the whole system being jammed up. Gregory Overton, a director at PricewaterhouseCoopers, said concern about the global crisis toward the end of 2008 brought expectations of increased premiums.

"There's been some capital raising as well," Overton told the delegates. And the rate increases that we've seen so far haven't necessarily been as high as people were hoping. So perhaps the market sentiment effect is a blip rather than a reversal of a trend. In Greaves' view, the insurers that have suffered the most severe pain so far have been those that have diversified from core activities into such areas as bancassurance.

Greaves expects the most obvious effects from the crisis will be on directors and officers and errors and omissions coverage, along with anything in the financial guarantee arena. Niche insurers can also expect problems, he said.

It all adds up to a potentially very bleak picture, Greaves said.

"Difficulties within the credit insurance sector can lead to repercussions throughout the market," Greaves said. "A withdrawal of credit insurance cover, he suggested, can, for instance, cause a client's already shaky stock price to plummet, weakening investor confidence."

Credit insurance is a piece of the market that's very well established in the U.K.-- a small number of large players in the main, Greaves said. "There isn't a company you can look at the moment whose cash flow forecast you can truly trust. Uncertain economic times may spark a move to quality among insurance customers, Greaves said. Some buyers, he added, may cut back on their insurance purchases, meaning there would be less to insure. This attitude may affect both discretionary spending and compulsory covers," he said.

"Claims will increase, with some clients submitting claims that they would not have bothered with in better times. We have seen and will continue to see increased incidence of fraud," Greaves said.

Overton pointed to sentiment within Lloyd's that the Lloyd's market is benefiting from being a collection of different entities. One result of such thinking, he suggested, could be a diversification of reinsurance purchasing.

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