Capital from new players helps recovery
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The market's inherent cyclicality was the major factor that helped it emerge from the liability crisis of the 1980s, with capital provided by formation of entities including ACE Ltd. and XL Group P.L.C. among factors that helped engineer the turn, observers say.
ACE and XL could be considered “at the vanguard of a lot of the additional new capital that did come in over the course of that decade that essentially encouraged the marketplace to become significantly more competitive,” said Joseph M. Fedor, executive vp and director at Pearl River, N.Y.-based U.S. Re Corp.
Brian O'Hara, former chairman and CEO of XL, said the “pricing power at the time was as hard as at any time in the history of the industry because of no capacity, so ACE and XL were able to charge strong premiums.” That “allowed ACE and XL to build up a lot of retained earnings over that hard market period from 1986 through 1991.”
Meanwhile, Mr. O'Hara said, the rest of the insurance industry was “able to finally go and get new public equity in the late "80s and early "90s, as they were able to quantify their balance sheets by that time, and so the combination of the capacity of ACE and XL and the rebuilt capacity by mainstream insurers,” plus appointment of more conservative judges by a Republican administration and tort reform, helped end the hard market.
Rees Fletcher, president and CEO of ACE Bermuda Ltd., a unit of ACE Ltd., said there was a recognition that the “pendulum had swung too far from a tort liability perspective,” which led to tort reform.
“Money poured in. ACE was formed. XL was formed. Things stabilized. People raised capital,” said John R. Berger, CEO of reinsurance at Bermuda-based Alterra Capital Holdings Ltd. “Rates came down because they were just so outrageously high.”
Jeanne Griffith, San Francisco-based casualty practice leader for Marsh Inc., said a “knee-jerk reaction” caused the crisis.
It “had to take time to smooth out,” she said.
