Financial Crisis Imperils Re/Insurers Ability to Access Capital

Insurance Journal
April 1, 2009


Insurers and reinsurers may have weathered the global financial crisis comparatively well so far, but they could be facing another threat. "We're not capitalized enough," was the way Michael O'Halleran, executive chairman of Aon Benfield, put it at the recently concluded European Insurance Forum in Dublin.

Although the re/insurance industry was able to handle the losses from 2008, the third worst year for natural catastrophes in history, it now faces a crisis of a different sort. The capital markets are in a coma. If a costly disaster results in further losses - a major hurricane for instance - the industry could find that it cannot replace the capital it needs to continue to function.

"This is the first time that the [insurance] market has been affected by the asset side of the balance sheet," said AXIS Capital CEO and President John Charman. As a result, the industry, more than ever before, will have to "get back to basics." Not only can it no longer rely on investments to make up for underwriting losses, but it may not even be able to rely on the capital markets to supply to supply capital.

Charman says the industry needs to do more. The financial crisis means that the industry must modernize "from a number of different points." It will have to "get back to basics, because its investments are negative; to set higher risk [evaluation] standards, more discipline and higher underwriting standards."

He also lays part of the blame for the crisis on the industry itself. The main problem isn't with the reinsurers, he explained, but is due to "commoditizing pricing." As a result premiums are too low, and "customers refuse to pay, even when the price is right,"

If insurance companies cannot offer the prospect of decent investment returns for potential investors, how are they going to attract capital? If the primary insurers don't "adequately price products, it discourages investors, as they can't make any money," Charman said.

A note of hope came from James Vickers, chairman of Willis Re International, who pointed out that "all the clever people" who saw the insurance industry as "not very exciting," were now wondering how it managed to survive the current crisis, while they are foundering. The industry had continued to "focus on what it's good at," said Vickers, "while the others went 'off piste.'"

If the industry can improve underwriting performance to the level it needs to make decent returns, it would therefore appear to be a good place - and a safe place - for investors to put their money.

At the EIF's final session, Sarah Goddard, the CEO of the Dublin International Insurance and Management Association (DIMA), asked a selection of panelists, including O'Halleran, Charman and Vickers, what the "elephant in the room" was? Capital - came back the unanimous reply. A secondary conclusion - also unanimous - was that if the needed capital cannot be raised, government intervention to assure continued coverage was probably the only alternative.


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