By DAN REYNOLDS, senior editor of Risk & Insurance®
When it released its fourth annual insurance risk study during this past September's reinsurance meetings in Monte Carlo, Aon Benfield was, in essence, releasing data that might have been tracking the progress of a shuttlecock thrown into the teeth of a Santa Ana or mistral wind.
The global equity meltdown was ravaging the insurance industry during the period of time that Aon Benfield put together its report, and in every category of insurance or risk management that Aon Benfield discusses in its 22-page work, the shadow of the globe's economic upheaval can be felt.
For starters, credit-related lines, such as mortgage guarantee, financial guarantee, accident and health, and trade credit have been severely impacted. Financial guarantee as a sector produced a combined ratio of 415 in 2008, according to Aon Benfield research, as compared to a an average combined ratio of 44 percent between 1996 and 2006.
In another category, the story of what's happening with public directors' and officers' liability insurance and its sister coverage errors-and-omissions liability insurance is still playing out. And perhaps underwriters that still work in that line learned their lessons from the period between 1999 and 2002, when D&O gross loss ratios were in excess of 150 percent, driven, according to Aon Benfield, by a combination of inadequate pricing and unexpected frequency and severity.
The story we keep hearing is that D&O isn't seeing any radical price increases yet, except in the financial sector. But there was an almost perfect storm of incredible events in 2008, and the impact of those on insurance won't be fully known for some time.
The size of the Madoff swindle alone could have been a once-in-a-lifetime event.
"It is something that, at least based on my experience, I haven't witnessed before, that one person can defraud a market during so many years for such large amounts of money," said Vincent Vandendael, the head of financial lines for Zurich.
"I'm sure there are other events that were of this magnitude, but having these sorts of consequences is pretty much unknown," Vandendael said.
And Madoff came on top of the credit crisis, which grew out of the Alt A loan crisis, which grew out of the subprime mortgage crisis, and all of that happened pretty much all on top of each other.
"So, yes, this is rocking the financial institution's world. It is definitely leaving an impact on the D&O and E&O and possibly even crime insurance, the Madoff case more specifically," Vandendael said.
"The insurers are going to get it a couple of ways, they always do. I mean, we're here to share the burden of society, right?" said Greg Flood, president of Bermuda-based Ironshore Inc's IronPro.
"I would doubt that the insurers are going to lose a whole lot of money on suits against Madoff himself because whatever insurance Madoff bought that was it," Flood continued.
"But the ones that are going to get clobbered on insurance, the biggest are going to be the feeder funds, which is what a Banco Santander or a UBS sounds like. You know there have been a lot of private banks in Europe that have been in the press as well as having been feeder funds to this guy, and Bank of Medici out of Austria seems to be the poster child for it, at least the first one out," Flood said.
"It's going to be a nightmare though when you think about this. The government has got to go in there and start restructuring all of these trades and ins and outs and stuff and see who in the Ponzi scheme made money and who lost money, and you are going to have dividends that were paid out in between while people left their principal in there. Oh my gosh, I don't know how you recreate it," Flood said.
In 2008, braced for higher frequency, insurers increased their initial, ultimate loss ratios for other liability claims made, according to Aon Benfield's study, which is titled "Insurance Risk Study: Modeling the Global Market."
Aon Benfield describes surety as a "laggard" in the impact a downturn has on it, so the worst may yet be to come for that industry as it relates to the massive correction we have just endured. That industry is strongly affected by economic downturns as evidenced by the 125 combined ratio that the industry suffered through what Aon Benfield calls the "stressed" period of 2001 through 2004.
In 2008, the industry had a combined ratio of 66 percent, which is far below the industry's long-run average of 96 percent. The recent golden years for the industry might have been the period between 1996 and 2000, when it registered an average combined ratio of 86 percent.
Ask a panel of experts about the relationship between workers' compensation losses and economic cycles and opinions will vary to the degree that you might end up being more confused on the topic than before you raised your hand.
And the Aon Benfield study authors give a nod to workers' comp's degree of difficulty in a downturn.
"Some argue that layoffs and shorter work weeks reduce workplace accidents because less experienced workers are let go. Others see a potential increase in losses as companies cut corners in maintenance and safety and place emphasis on back to work initiatives," the Aon Benfield study said.
Of course, we've also been told that return-to-work initiatives, done properly, can be a good way to create a more engaged workforce and cut down on losses as workers who might otherwise be left rusting can dust themselves off and start earning some kind of paycheck before returning to full capacity.
Before he left in July, Marsh's former practice leader for workers' comp postulated that in the short term economic slowdowns might not produce a spike in injuries. But over time, as older workers in pain stay on the job longer in the effort to hold onto their paychecks, nagging injuries or latent conditions might eventually come to the fore, leading to an overall spike in claims.
"Initially, claims will stay rather predictably low or may actually decrease because, in an environment where you are not secure in your job, you are more likely to work through the minor aches and pains of an injury and treat it as medical-only, or not tell anybody about it at all because you are worried about your future employment," Mark Noonan told us in late May.
"Statistical analyses of the results tend to be inconclusive and are certainly a second-order effect relative to primary pricing levels," the Aon Benfield authors conclude.
October 15, 2009
Copyright 2009© LRP Publications