Insurers look forward to bright 2007 despite concerns about cat risks

NEW YORK—After a strong 2006, insurance industry executives and observers are optimistic that 2007 also will be marked by positive developments for the property/casualty sector.

Although insurers should continue to be wary of heightened catastrophe risks, with a Democratic-controlled Congress they are more likely to see a permanent solution to terrorism insurance issues, and another high profile issue--fallout from regulatory probes into stock option scandals--should be manageable for insurers.

Those were some of the main points made by insurance industry executives, industry observers and regulators during panel sessions at the Insurance Information Institute's annual Property/Casualty Insurance Joint Industry Forum in New York last week.

Strong year

Panelists agreed that 2006 marked one of the strongest-ever years for property/casualty insurers--one that generated an estimated $60 billion of net income and had a combined ratio of about 94%--due largely to the combination of unexpectedly low natural-catastrophe losses and increased pricing discipline by underwriters.

Despite the profitable results, insurers should not become complacent, said Martin Sullivan, chief executive officer of New York-based American International Group Inc.

"We should not declare a victory by any stretch of the imagination," Mr. Sullivan said.

The dramatic drop in hurricane activity witnessed in 2006 should not shake insurers' outlook on the severity of storms, as "we have a period of time ahead of us where the risk potential remains significant," said Pierre L. Ozendo, CEO-Americas, Swiss Reinsurance Co.

Looking ahead, the Democratic victory in the midterm elections could impact pressing industry issues in 2007, panelists said.

With Democrats in control, there is a greater likelihood this year of reaching a long-term resolution to the problem of offering terrorism coverage, said Matthew Mosher, group vp of global property/casualty ratings at Oldwick, N.J.-based A.M. Best Co. Inc.

At the same time, Democratic control could "pull things back a little," for tort reform, said Jay Gelb, senior vp and senior nonlife insurance equity analyst at Lehman Bros. in New York.

Regulatory investigations

On the issue of investigations into stock options backdating, panelists agreed that, in general, the industry can withstand any exposures emanating from the scandal that has implicated hundreds of corporations.

While regulatory probes and ensuing shareholder lawsuits have resulted in an "upward spike in exposure" for insurers, "I don't know that it will be a major issue," said Mr. Mosher.

"We are obviously following this issue very carefully," said AIG's Mr. Sullivan, but it should be "manageable" since the majority of shareholder suits being filed are derivative cases, which historically have been easier to settle.

On the subject of contingent commissions, Brian M. Storms, chairman and CEO of New York-based Marsh Inc., said that while he expected that contingency fees would be eliminated across the industry--by both brokers and insurers--he noted that most other industries offer some sort of incentive-based compensation structure.

Robert P. Hartwig, III's president and chief economist, and Marc Racicot, president of the American Insurance Assn., served as moderators for the discussions. According to the III, this year's forum drew 244 attendees.

The next Joint Industry Forum is slated for Jan. 8, 2008, in New York.