Property Casualty Insurers Face 'The Year of Living Dangerously'

Property and casualty insurers probably feel as if they're living in earthquake ravaged Haiti: lack of money compounded by incredible bad luck, and now waiting for the tsunami to roll in.

That was the mood at the Insurance Information Institute's property/casualty conference held yesterday in, ironically, the glittering Waldorf-Astoria Hotel in New York, where the III is based. But there were no bright spots in what a panel of insurance experts and industry chief executives had to say.

P/C companies are going to be squeezed at both ends. Having declined for three years, premiums will continue their downward spiral in 2010, while underwriting losses will rise. Is there light at the end of the tunnel? Maybe they'll go up a little in 2011, predicts Barclays Capital analyst Jay Gelb.

The other pinch comes from investment yields. P/C insurers, because they have to keep assets liquid to pay for, well, earthquakes, keep their money in short-term securities. The interest has been and will be virtually zero as the Federal Reserve tries to rebuild the economy - and the spendthrift banks - with cheap money.

Now the bad luck. P/C insurers are being dumped in with the rest of the financial industry in terms of the current crisis and consumer backlash, even though, as they will happily tell you, they didn't do anything wrong. In addition to a dismal economy, Providence Mutual CEO Sandra Parillo says they are facing "aggressive competition, all clawing for the same piece of the pie."

American International Group's woes, once again the subject of impending federal hearings, are going to hurt P/C insurers. More than a few, including CNA Financial CEO Thomas Motamed alluded to this. Since AIG competes against them with federal money from its $182 billion bailout, it has a definite edge.

The larger insurers are also looking over their shoulder waiting for the "too big to fail" rules to come down from the federal mountaintop. Under that plan big companies like MetLife may have to contribute to a mutual support fund that would pay off if one of them was about to go under. A good idea in theory, but the industry already does this at the state level, and at the federal level it would cut into insurance capital and earnings, says Gelb.

This would also brand insurers with an undeserved stigma, warns Terri Vaughn, executive director of the National Association of Insurance Commissioners. "You tag a company with 'systemic risk' and you've created a whole new problem," she warns.

Then there's Florida, another potential black eye for the industry. Gov. Charlie Crist has basically said "Good riddance" to major insurers, forcing citizens to go to undercapitalized carriers. Even worse, warns Brian Sullivan of Risk Information, is that these carriers have no claims departments, so in the event of a hurricane, homeowners' claims won't be handled for weeks or months.

Finally, p/c insurers are being dragged into the public relations battle over President Obama's health care plan, warns Leigh Ann Pusey of the American Insurance Association. She pointed to one congresswoman who accused insurers of "raping and pillaging," without specifying that she meant "health insurers."

Then Professor Scott Harrington of the Wharton School delivered the coup de grace. He warned that Democrats, angry at not getting their public option, could slip a measure into the health care bill that would abolish the industry's McCarran-Ferguson antitrust exemption.

So was there any upside to the day? Yes, everyone believes P/C, which apparently thrives on low profits and lean times, will muddle through. And those Waldorf cookies were good.