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Mario Vitale is co-CEO of Aspen Insurance in New York. During the Risk & Insurance Management Society Inc.'s recent annual conference in Philadelphia, he spoke with Business Insurance Senior Editor Mark A. Hofmann about the current and future challenges facing the insurance industry.
What I'm hearing mostly being discussed in Philadelphia are a couple of issues. One, prices are starting to rise and necessarily so, particularly in areas where there've been a lot of catastrophe losses, and that includes in the United States. There's a lot of need to move up in rates, not including inflationary costs. You'll see cat-exposed property most often talked about as to how it's increasing. No lines of business seem to be decreasing any more, which is good news. The amount of the increase is dependent upon the line, but just about everything's moving up. After seven years of the soft market, it actually is quite necessary if you look at that combined with the lack of investment income that's coming from the financial markets. The high amount of cat activity in general— that's really taken everybody by surprise last year, including Japan, Thailand and in the U.S. tornadoes, which of course is continuing this year.
I also hear that a big topic is contingent business interruption, supply chain interruption. We've seen countless examples in the last two years about how much just-in-time supply chains have been affected by all of the catastrophes, including what happened in Thailand and Japan and Iceland with the volcano. It's really just amazing. Certainly for lines of business like workers compensation, everybody's talking about drastic price increases, although Aspen U.S. doesn't participate in that line of business by choice.
The other issues that are facing the market include what can we do to finally improve the effectiveness and efficiency of the U.S. markets? The domination of 50-state regulation and how difficult it is to bring a national product to market in the U.S. is just something that has to be addressed. Quite frankly, I think the sooner the Federal Insurance Office starts to address something like that, the better off we're going to be.
We're a global company. We're both a reinsurer and insurer. I think there's no doubt that our reinsurance colleagues are taking a hard look at the models that they use to model risk wherever it may be in the world. I know Aspen U.S. Insurance is looking differently at the world after the RMS 11 implementation, which basically said that losses in the U.S. will be larger and deeper and go further inland than we expected before. So we are implementing the major parts of RMS 11, and using that modeling to help us steer our risk selection and pricing decisions going forward.
Separate from that, the things that make Aspen U.S. special are the things that we are doing in the market differently anyway. We are using an integrated approach with claims and underwriting, working hand in hand on our risk selection basis as well as pricing basis. Those are the kind of things we believe will be great differentiators for us, and the distributors that we do business with are starting to see that and are helping us to be successful.
I believe you're going to see continuing firming. I actually think it needs to be accelerated. The fundamentals of why rates have to go up are in place. Seven years of a soft market, bad investment income, inflationary costs, costs of regulation, the way the rating agencies are looking at the business including the new models that are in effect—all of this is requiring rates to go up. That's the known, and we're seeing the fundamentals of that work. What we don't know is catastrophe, major catastrophe. We saw some pretty drastic storms in Oklahoma. Wherever that next major cat might be, whether it's in the U.S. or in the world, that's going to have a contributing impact. I believe that the ability of the industry to continue to reduce reserves as they've done much in the past is coming to an end. I think that some of the excess capital has been removed from the market last year by the number of cats that we had, and you saw that in companies' results. I think that the next big cat, if it's a major one, could be the tipping point that could move it from a firming market to a hard market.