John Degnan - Chubb Vice Chair Kicks Off IMUA 79th Annual Meeting: Contrasts Insurance v. Financial Markets, Warns Attendees Insurance Regulatory Environment May Dramatically Change

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I Chubb Vice Chairman and Chief Operating Officer John Degnan, gave attendees of the 79th Inland Marine Underwriters Association (IMUA) his frank assessment of where he believes the industry stands today. He said that 2008 was an unprecedented year on many levels, giving rise to an uncertain insurance market. He pointed to three key factors - profitability declined dramatically due to catastrophe losses; unprecedented investment losses impacted a company's balance sheet; and surplus levels dropped significantly.

They are seeking stability and predictability in face of financial uncertainty. Help them understand costs and exposures that demand pricing to exposure.

In keeping with the Association's tradition of beginning each annual meeting with a senior insurance executive's "bird's eye" view of the Property & Casualty industry, Chubb Vice Chairman and Chief Operating Officer John Degnan, gave attendees of the 79th Inland Marine Underwriters Association (IMUA) in Tucson, AZ his frank assessment of where he believes the industry stands today.

Mr. Degnan began his remarks by telling attendees that 2008 was an unprecedented year on many levels, giving rise to an uncertain insurance market. He pointed to three key factors - profitability declined dramatically due to catastrophe losses; unprecedented investment losses impacted a company's balance sheet; and surplus levels dropped significantly.

However, among the bleak economic news, Mr. Degnan noted that the customer's flight to quality was stimulated by the market's dislocation. He opined, "The present economic conditions will ultimately help financially strong insurers offset the decline in business. And, there will be additional growth opportunities arising from the weakened condition of some insurance companies."

Mr. Degnan noted that now more than ever an insurer's financial strength could be an overriding consideration in company selection. He said, "Insurers should be viewed with the same skepticism as other financial institutions with questions like - Will the carrier be around to pay claims? Will it remain well capitalized? Will it be operated by the same people? Will it be true to pre-crisis values? In short, not all carriers are created equal."

In defense of the insurance industry, he noted that unlike their financial market counterparts, insurers operate without the significant leverage allowed for banks or Wall Street firms. And, an individual insurance company's financial posture is tied to its reserve strength, asset base and underwriting philosophy.

He told the IMUA attendees to acknowledge the challenges that are faced by their customers. "They are seeking stability and predictability in face of financial uncertainty. Help them understand costs and exposures that demand pricing to exposure." Mr. Degnan offered that this is what keeps the industry healthy and able to fulfill promises. In fact, he feels confident that customers will pay more for balance sheet strength than in years past.

In his concluding remarks, Mr. Degnan tackled the current regulatory regime. He simply stated that the industry will continue to face a tumultuous and potentially transformative period, at least for the near term. He predicted that some carriers may fail, while others will shrink or become less risk tolerant. "The regulatory climate will be dramatically affected by emerging economic populism," he stated. Deregulation has been deemed an underlying cause of the current economic crisis. As a result, modernization of the insurance regulatory mechanisms is inevitable."

He pointed to the three key themes for industry regulation. They include:
1. P&C insurance does not pose the same systemic risk as banks, and should not require taxpayer intervention.
2. P&C insurance is essential to our national economy.
3. The global nature of risk transfer calls for the inclusion of P&C in any systemic risk regime.

"P&C insurance accounts for 2.4% of the US annual GNP and has more than $535 billion in capital. The industry purchases close to $370 billion in state and municipal bonds. It pays almost $200 billion in claims each year and employs, directly or indirectly, about 1.5 million individuals. The industry is largely insulated from the current financial crisis because it is generally low-leverage businesses. It has lower asset to exposure ratios compared to other financial institutions, and it has more predictable cost outflows." he stated.

"So why should Congress be discussing functional federal regulations?" he asked the IMUA attendees? "State by state regulatory regimes are fragmented and ill prepared to close gaps in regulation. What the industry needs now is regulatory efficiency." That, he notes, includes coordinated, more sophisticated analysis of market trends; the ability to deal with systemic risk before a crisis develops; and an integrated insurance voice that can respond to the global financial crisis. The challenge will be to avoid duplicative and inefficient regulation."

IMUA is the national association for the commercial inland marine insurance industry. IMUA serves as an industry voice of its member companies representing approximately 90 percent of all commercial inland marine insurers in the U.S. The Association provides its members with comprehensive educational programs including research papers and bulletins, industry analysis and live/web seminars. IMUA was founded in 1930.

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Allan Fliss
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