Personal Finance

Is Insurance the epitome of Calm amidst a Financial Crisis?

The insurance industry takes pride on its ability to be there for millions, during their worst financial situations.

The insurance industry takes pride on its ability to be there for millions, during their worst financial situations. But at the moment, the executives in the specialist insurance market themselves are facing an emergency.

Because of this reason, the tempers are starting to fall into pieces, and the business owners are rewriting the business plans accordingly.

This has even got the regulators worried, as the problem which is being built up for all these years, is going to reduces the profits.

This is termed as an era of soft market, a period of falling prices. Which has continued for almost over five years now, in the sector of specialist insurance and reinsurance. Time and again there was a hope of an upturn, but it was completely ruined. People at the top positions of insurance industries, are equally worried.

Late last month, Inga Beale, chief executive of Lloyd’s of London, warned the people that the home of British Insurance is expecting the market to shrink this year and the next. She advised that the insurers should exercise underwriting strong disciplines, improve the efficiency, and reduce the costs.

It is even reported that the rates of some types of reinsurance, predominantly the property related policies, seem to have fallen by 40%. All this in the span of the past five years. Since the prices are still deteriorating, the level that we have reached, seems to be unattractive.

In his forthcoming book called the ‘Risk & Reward’, industry veteran Stephen Catlin mentions, “insurers find themselves in the marketplace where the level of pricing is close to unsustainable”. Tendencies to no longer make larger claims that tend to drive prices up, is one of the reasons for the low prices.

The year 2011 was the last year when there was a big natural upheaval of claims, this was due to the earthquakes in Japan and New Zealand. In addition to this, the invasion of capital is competing directly against traditional reinsures.

In the last five years, investors are bucketing money into investment vehicles, termed as Insurance Linked securities (ILS). The reason being, the investors get better returns than elsewhere. It has been reported that the capital amount that was being deployed in ILS vehicles, has increased by 13%. This was roughly three times higher than it was five years ago.

Supply growing faster than demand, means only one thing for pricing. At least, the insurers are still profiting from it. The root cause of the problem is the way insurers report the results, which does not reflect the underlying performance.

After you strike out the effect of reverse release and abnormally low natural disasters, the insurers are making Return of Equity (ROE) of just over 3%. Further natural disasters would push the insurance companies into a great loss.

Last week, in his speech, David Rule, the executive director for insurance supervision of the UK Prudential Regulation Authority warned, “Insurers may be underestimating risks, particularly on new businesses. For example, they may be too sanguine about catastrophe risks, such as significant weather events.”

The pressure is clearly seen increasing upon these insurance companies. There have been complaints surfacing by the insurers, that the brokers are taking more than their actual share. This is done by increasing the commission and introducing some added charges.

One such incident reported by the chief executive of insurer Chubb, Evan Greenberg, used the current annual report to attack the abusive behaviour from the brokers. He warned that, this abusive behaviour will be unsustainable from an underwriting perspective.

To which the brokers hit back, in April, Dan Glaser, chief executive of broker Marsh & McLennan, came forward to quote, “Most trusted advisers and carriers can be commoditised and disintermediated if they become complacent.”

Most industries now are taking actions and cost-cutting has become common. Lloyd’s of London is almost losing 70-80 jobs which is around 10% of its workforce in London. Most analysts state that there could be more to come for the insurance industry.

Even though there is no material explanation to this, but there are chances that it might happen if any more disastrous events occur which will drive underwriting losses.

One such event can be the claims of the PPI policies, that were largely mis-sold by the banks. Over the years, people have been making claims, either all by themselves or with the help of Claim Management Companies. To claim PPI yourself, you are expected to meet these guidelines:

• You should have the paperwork regarding the loan, mortgage, or credit card that you own. If you do not have the paperwork, you can ask your bank lender to send you a copy of it.
• Once you have the acquired the paperwork, write a letter to your bank explaining them that the policy was mis-sold to you. Attach a copy of the paperwork along with the letter.
• If the bank or lender does not respond to you within eight weeks or turns down your claim, write about your issue to the Financial Ombudsman Service.
• The ombudsman will look at your case, which can take a long time, but if it decides in your favour, it will contact you.

Overall, the insurers are making changes in their business plans. This is helping the companies to come out of the worst markets, and expand themselves in more promising, higher growth areas, such as the cyber insurance. Whereas, on the other hand, most other companies are trying to keep hold of their clients by offering them generous coverage.

The clients want to maintain the premium volume; therefore, companies are trying to expand in the parts of market that could be reasonable. Clients are being offered more multiyear deals in reinsurance, while the outlook for the most traditional lines of business remains depressed.

According to reports, in the month of July (the renewal season), the prices of property reinsurance fell almost by 10%. Looking at the recent scenario in the market, there is no hope for an upturn for it, and some wise men in the industry doubt there ever will be any upturn.

There is always a probability that the big claims might eat up some of the insurance industry’s capital amount, but there is more to it as well. As the pension funds and other investors have realised the insurance risk, many are believed to continue pouring money in. All this by keeping the prices low and the profits even lower, for years.

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