Potentially record-setting profits this year for insurers might lead to a slew of problems down the road if it prompts “suicidal” competition and eroding public perception, a top Lloyd's official warned.
Indeed, regulatory reluctance to permit profitable rates, along with sluggish premium growth bode ill for the future of the industry in coming years, said Lloyd's America President Wendy Baker.
Rising surplus could result in an oversupply that will put further pressure on the industry's bottom line, Ms. Baker said during the 18th Annual Executive Conference for the Property-Casualty Industry. “We have to return to basics, which include not underwriting for market share, recognizing that terms and conditions can be just as important as pricing, and sticking to what you know best,” she said.
The industry's potentially best underwriting performance in 51 years–primarily due to a lack of storms after last year's recording-setting hurricane losses–along with record overall profits could present a recipe for “financial suicide” if insurers make all the wrong moves to gain market share, warned Ms. Baker.
While some of the industry's bottom line numbers might seem impressive, a return on equity of 9 percent and a 2.9 percent increase in premium are not among them, she said. While property rates in disaster-prone areas are holding steady, “it is important to remember that in the non-cat areas, rates are actually declining”–in some cases quite precipitously, she added.
In addition, the industry faces a public relations challenge in the aftermath of Hurricane Katrina, she said, noting that numerous headlines from around the country paint the industry as “the villain,” when in reality 95 percent of 1.7 million claims have been settled amicably. “We must work hard to set the record straight,” she said. “Profit is not a dirty word.”
Ms. Baker also repeated a frequent Lloyd's complaint that reinsurers remain hamstrung by the “ancient hodge-podge of rules” governing U.S. state markets, including those that require alien reinsurers to post 100 percent collateral of liabilities.
“Collateral requirements should be based on financial strength and not on ZIP code,” she said.
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