BOSTON—Just as regulation has prompted banks to move toward consolidation, one insurance executive here at the PCI Annual Meeting is calling for the same in his industry.
Joseph P. Brandon, a consultant with Alleghany Insurance Holdings when it purchased Transatlantic Re for $3.4 billion in November 2011, said during a CEO Panel he predicts “secular consolidation” as the economy continues to slowly improve.
There will always be a place for “small to medium-sized companies that are nimble,” Brandon, now executive vice president of Alleghany adds. Consolidation won't mean a less choices. “There's not going to be an Intergalactic Re,” joked the one-time CEO of Berkshire Hathaway's General Re Corp. “But consolidation is going to continue.”
In fact, he added, many times executives prefer not to roll with the tide of an acquisition. They prefer not to be part of a large company and start their own ventures.
However, Michael McGavick, CEO of XL Group wondered aloud if new regulatory burdens on insurers' capital would “require greater concentration,” resulting in insurance companies resembling utility companies–very large and lack innovations.
RESERVE CRISIS OVERDUE?
Hiscox USA CEO Benjamin A. Walter wondered if recent reserve troubles from peers like Meadowbrook and Tower Group signaled a trend.
He said Tower has been called a “one-off” but added that he's seen reports indicating industry reserving difficulties are cyclical.
“There has been a reserving crisis about every eight years, historically, and the last one was 12 years ago so we are overdue,” Walter said.
Rating agency Standard & Poor's expects the reserve-release “cushion” to diminish more in 2013, according to a recent report.
Credit analyst Tracy Dolin told PC360 the industry's reserve position, on a whole, is “adequate,” especially for years 2002-2008. These are the years from which most the reserve releases, to bolster profitability, have originated over the last few years.
But there remains some unknowns about 2009-2012 because these reserves “are not mature and are from a soft-rate cycle,” Dolin added. Commercial lines insurers with long-tail risk such as workers' compensation are more susceptible to adverse reserve developments. Reserve releases from recent years would concern the rating agency because deficiencies could follow.
Workers' comp was one of the lines contributing to Tower's $365 million strengthening of loss reserves for accident years 2009-2011.
In comments during a third-quarter earnings call, W.R. Berkely Corp. CEO William R. Berkley hinted more companies could be facing reserve problems, which is causing them to withdraw from certain lines of business.
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