Brian Duperreault tells the European Insurance Forum 2003 to beware the new breed of risk-averse insurance manager, says Chris Don.
According to Brian Dupperreault, the chairman and CEO of ACE Group, insurers are losing their appetite for underwriting. In an increasingly risk-averse era, companies are reducing limits and withdrawing from problematic lines of business. Meanwhile legislation like the US Sarbanes-Oxley Act 2002 is stifling entrepreneurial leadership.
Speaking in the keynote address on the first day of the European Insurance Forum in Dublin, Mr Dupperreault began by offering his views on the likelihood of further rate rises going into 2004.
Hard market philosophy
Focusing first on price rises in the casualty sector, the ACE chief commented: "Everyone seems sanguine about the persistence of the hard market well into 2004." He said the US property market had corrected itself and the catastrophe reinsurance market was now fully able to meet demand. This suggested there was little prospect of further price change in those sectors during 2003. Meanwhile, property rates continued to rise in Europe. A large segment of the insurance population was rejecting terrorism coverage at current prices and insurers were meeting such demand purely in order to fulfil third-party requirements.
From the perspective of the industry as a whole, capacity in the insurance business was shrinking. In the immediate wake of September 11 there was a renewed appetite for investment in insurance, but this had since dried up. Now, finding capital for a new start-up or IPO is proving very difficult. And with equity prices depressed, secondary offerings for established companies represented very expensive capital. Consequently there is little new money coming into the industry.
Mr Duperreault said it was surprising to see how much capital had left the business despite a widespread hardening of rates. Measuring the outflows directly resulting from September 11 was relatively straightforward, he observed, but it was less easy to measure capital withdrawn by companies reducing limits or withdrawing from particular lines of business. Tens of billions of dollars ebbed away as a result of weak equity markets, hitting European insurers and reinsurers in particular. Mr Duperreault also guessed that "the reserve strengthening for asbestos, commercial liability, malpractice and a variety of other past developments probably took another $10bn out of the industry surplus."
After years of languishing in the low single-digits, US insurance premiums were up 13.6% in 2002 and the forecast was for another 12.3% 2003 - an increase in US premiums written of about $90bn over two years.
Mr Duperreault discounted the idea that the insurance sector would be moving from a demand-driven cycle to a supply cycle over the next 18 months. "There are two schools of thought about what is going on here," he said. "One is that the industry is fully leveraged and a lower appetite for large risk accumulation and rating agency pressure is limiting the industry's ability to grow and be aggressive with regards to competing for new business. The other side says capital is both available and adequate to meet return on demand." Whichever side of the debate insurers fell on, it was "certain that the words surplus, or excess surplus, are forgotten phrases in our business."
Increasingly the business was dividing itself into "haves and have-nots," he observed. Companies following stringent underwriting discipline and paying attention to risk reward dynamics would be the ones who were on the side of the `haves'. The industry was at the crossroads and Mr Duperreault expected to see "fewer and fewer `haves' in the world order."
Turning to the issue of trust, Mr Duperreault focused on a series of recent corporate scandals that had provoked calls for reform. "The legislative and regulatory actions recently enacted in the US will have a profound effect on global society, the economy and financial markets for many years to come," he said.
Looking to issues of corporate governance and the Sarbanes-Oxley Act 2002 which recently passed into law in the US, Mr Duperreault expected the immediate impact to be "a reduction in entrepreneurial spirit. As the decision centre shifts from a management incentivised to take risks to a board that is inherently risk-averse, the entire spectrum of corporate risk taking will fall.
Slow growth forecast
He contined:"This will undoubtedly slow American corporate growth and will have a similar affect on markets around the world." CEOs would find themselves being second-guessed by "less experienced but more risk-averse directors." Referring to the recent cull of at least eight CEOs in the sector, Mr Duperreault warned: "This is an extraordinary moment in time when the world is becoming more risk-averse - and the only industry in the world that takes risk is being run by people who don't know the business side of it... These practices will slow the recovery."
Summing up on a more positive note, Mr Duperreault confidently expressed the view that the industry was on the threshold of improvement. Pricing conditions were favourable, he noted; there was leeway for interest rate rises; there was a strong possibility of an economic recovery; and reform of some of the most onerous abuses in the claims environment - notably asbestos - should lead to "a stronger, more viable industry that is better able to withstand market cycles and to meet the needs of its customers and producers."
By Chris Don
Chris Don is a director at insurance specialist marketing company Signum Marketing Communications and a specialist writer on re/insurance issues.