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Editor's note: The questions and answers that follow transpired during a panel of insurance and reinsurance executives at the Risk Management Forum 2005 of the Federation of European Risk Management Associations last fall. The session was titled "The market--Where are we now and where is it going?"

Q: Will insurers keep their vows on price discipline? Will the 2006 renewals see price increases or not?

Baugh: I think that's a question that's still one where the jury is out. By all means, the models will have to be reviewed, and our view of frequency and severity has to be reconsidered in light of hurricanes Katrina and Rita. I've heard said that the full impact of the industry losses will not be known until at least the first quarter 2006. The variables that exist in this case--questions of flood versus wind storm damage, questions about policy wording or interpretation, questions about class actions--are really not known yet.

Riddell: My call right now would be that you will not see any further price reductions on the majority of property/casualty in Europe. I am going to say there will still be variation in individual catastrophes. But the market is going to have to adjust to deal with the severity issues and getting their pricing right. I don't think that in Europe the effects of Katrina will directly roll over into the liability market. But in the United States energy sectors, there's no question that prices are going to rise . . . the question is by how much. {The same goes for] the majority of U.S. property. And U.S. liability, both in the primaries and excess areas, will be impacted not because people are going to try to recover money from the Katrina losses off the liability impact, but because the return on equity on the liability sector was already dipping below most people's rates.

Kendrick: I see impact on pricing from Katrina and Rita . . . Where will we see it first? We're already seeing it in London, all U.S. business. We're seeing it in capacity risk. Wherever there's capacity needed, that's where you'll see rate increase. So now how quickly will it move into the rest of the global market? It's difficult to say. There's a need, a desire, to fairly price risk, and we need to do that right now.

Q: Isn't it a bit contradictory saying that we have never been as good at pricing risk as we are now, and then say that Katrina hit you?

Kendrick: I think we're much better at understanding pricing casualty risk, financial lines risk. Property . . . we still need to work on. But still I think there is a much better discipline about understanding what we need to do. I agree that there is a degree of contradiction in what I say. But I think that what it demonstrates is that we need to continue to do that analysis, and I think that we need--as any industry, and you as a purchaser of our product--need to understand that this is not an accurate science, and that we are constantly learning, and we are getting better.

Q: How can you maintain your disciplined stance while others cut prices and you lose business to them until your cost ratios or other things start to hurt you?

Theis: You may say that because of those hurricanes, we are now seeing a different pricing environment and a different approach. More financially sound companies can take advantage of such an environment because they haven't gambled and so far, they can provide capacity to the needs of the client. If you want to be a serious and reliable capacity provider, you have a technically sound approach to business. Otherwise, you will not be there for long. Sometimes it's better not to write any piece of business than to write incorrectly priced business.

Q: On pricing, you are telling us, the hurricane (Katrina) in the United States, as horrible as it might have been, will lift prices for a small industrial factory in the Black Forest, while the Black Forest storms in the 1990s obviously did not increase prices of a small factory in Tennessee. So the global exchange of risk works basically in one way. Is there a one-sidedness in global distribution of risk favoring? Do European companies pay a higher share of the global risk than they ought to? Are you surprised that people don't believe you if you say the prices have to go up, and just see the hurricane as a pretext for lifting prices?

Riddell: I didn't hear anybody on this panel say that prices for a company in the Black Forest would go up. We talked about what would happen in the U.S. market, and elsewhere. What we said is you won't see continued reduction in Europe. What we've seen in asbestos and what we've seen in the United States in the past is that when European insurers played in the United States, they got burned. When they lost their capital because of that, the only place they could recover it was in their home markets. But I don't see evidence beyond that of cross-subsidization of losses across the marketplace.

Theis: The hurricanes will lead to a wake-up call to the industry that we may underestimate our current exposures not only in the United States, but in other regions. So people will start to look at their exposures in certain areas--U.K. flooding, Italy earthquake, maybe even some scenarios in Germany. We need to have a different approach to what sorts of exposure we have out there.

Albers: If the argument is that the insurance industry has generated excess profits, then we are not getting anywhere with this allegation. Because it just has not happened. But I think it's a question about behavior, which is rates. One area where I see a source of the discomfort is our process of syndication is somewhat in-transparent. And it's less transparent probably than the syndication of loans or other financial instruments.

Baugh: You're talking about a truly catastrophic event--$100 billion net, which modeling has shown and it doesn't really do us a lot of good to look backward and say, well, the last two big storms were in the United States, so therefore $100 billion is going to come from the United States. I think we need a global capital base, and we need a global insurance industry to be able to step up to that event regardless of where it struck.

Q: How did (Spitzer and other U.S. regulatory issues) affect the way you did business in Europe? Did clients mind at all? How do you view the present debate in favor of more regulation--both by the EU and by national regulators in Europe?

Baugh: I think there was a great deal of interest because in many respects the corporate governance structures that are in place in Europe are more strict than those in the United States. Customers care. Customers want to understand what happened. In a certain sense, the customers recognized that the approach and the powers of the attorney general of the state of New York are different than the European approach, and different than the powers that similar regulators would have not only in Europe, but most markets in the world.

Riddell: I think where we've got to is a world where behaving ethically is something we take as a given. What we have to do is demonstrate that we behave ethically and demonstrate that we have the processes and procedures in place to behave ethically. And we have to when we look at ethical behavior not just look at the laws and regulations. We're being judged on yesterday's actions by today's standards. So if you're going to behave ethically, you have to look at those future standards. So that behaving ethically means going beyond what is expected of you by pure interpretation of today's regulation.

Kendrick: I think that we were all pretty shocked by the revelations that occurred in our industry--insurers and the brokers. It was a good wake up that allows us to look at the way we conduct business, to inject transparency. If you decide to take it upon yourself to operate ahead of the regulatory curve, and regulators are getting tougher and tougher, I think that gives you a competitive advantage because regulation will only increase. It won't decrease.

January 1, 2006

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