Industry still faces challenges; Lloyd's exec

SEATTLE—Despite improved financial results, insurers still need to address serious financial, reputational and operational challenges, a Lloyd's of London executive warns.

Julian James, Lloyd's London-based director of worldwide markets, said Monday in remarks to the annual meeting of the Property Casualty Insurers Assn. of America that "despite our current good fortune, I could make a strong case that we are still standing near the edge of the cliff," much as he had predicted four years earlier when he last addressed the PCI in the year following the Sept. 11 terrorist attacks. "Unlike in 2002, we just don't realize it."

The industry has passed a key financial test in dealing with massive 2005 cat losses, he said. In addition, U.S. profits this year are forecast to be the best in a generation at $55 billion to $60 billion.

Yet, "we are in grave danger of eroding the progress that we have made," Mr. James said.

The industry's financial challenge is to "stay out of the intensive care ward," he said. Four years ago, the industry was even worse off than that, though--"on life support," Mr. James said.

Today's situation is dramatically different than that of four years ago, he said. "If the remarkable underwriting performance of the first half carries through to year's end, the U.S. property/casualty industry could have its best underwriting results in 51 years--beating the 94.9% combined ratio recorded in 1955," Mr. James said.

"But if you look at long-term industry performance, it's not pretty," he said. The industry has achieved an underwriting profit in only three years--1977, 1978 and 2004--over the last three decades.

The early warning signs of the challenges ahead are there--weak premium growth, decreasing rates in most noncatastrophe areas and rising policyholder surplus.

"It all adds up to a picture of stagnant demand and over-supply," he said. If that's not bad enough, it is coupled with external factors including a slowing U.S. economy, rising claims costs and regulatory intervention, which is preventing insurers from charging risk-based rates, especially in disaster-prone areas.

If the industry is to build on the progress it has made, according to Mr. James, companies must adhere to four "basic rules of business:"

The insurance industry also must respond to the reputational challenge caused by "a growing vilification of insurers" by challenging "the popular notion that profit is a dirty word," Mr. James said.

"Quite simply, we must do a better job of explaining to policyholders, regulators and other key stakeholders how a solvent global insurance industry underpins the U.S. and world economy," he said.

Insurers also must respond to the behavioral challenge posed by globalization. Protectionist laws must be eliminated, Mr. James said, especially in U.S. reinsurance regulation.

As he did in 2002, Mr. James concluded his remarks by saying, "Our thinking and behavior must change if the insurance industry is to be a stable, secure industry for our policyholders and shareholders of the future."