CAS Spring '97 Meeting Focuses on Catastrophes
SAN ANTONIO, Tex. - At the CAS Spring Meeting in San Antonio, a panel of chief executive officers agreed that excess capital in the property/casualty insurance industry overall and capital available for catastrophe risks is insufficient.
Ramani Ayer, chairman and chief executive officer, The Hartford, observed there is tremendous capital strength in the business today that is driving the competitive environment, but at the same time, capital for catastrophe exposures is not adequate.
Gen. Robert T. Herres, USAF Ret., chairman and chief executive officer, United Services Automobile Association, said that investors have to be as creative as possible in packaging investment instruments that provide an opportunity to share the risks and generate investment returns.
Ronald L. Bornhuetter, chairman, president and chief executive officer, NAC Re Corporation, reported that following recent reinsurer consolidations, 80 percent of the business in the United States is written by a handful of companies. Most of his company's clients say security is the first issue that is looked at in purchasing primary coverage, so the concentration of capital is the number one concern.
Brian Duperreault, chairman, president and chief executive officer, A.C.E. Insurance Company, Ltd., said that in the reinsurance business consolidation is here to stay, primarily driven by the buyer. For example buyers concerned with the financial strength of their reinsurers don't want to see a slip with 20 to 30 reinsurance companies, many of which are unfamiliar.
In a panel discussion on catastrophes, experts agreed that a private sector solution may be the key to reserving for the mega-catastrophe of the future.
Vincent Laurenzano, assistant deputy superintendent and chief examiner with the New York State Insurance Department, said that if Hurricane Andrew had hit downtown Miami, the losses could have totaled $50 billion to $75 billion. With total industry surplus estimated at $250 billion, such a disaster would have been a crippling event for the industry.
According to Ross J. Davidson, Jr., vice president of corporate finance, USAA, a $50 billion industry catastrophe could leave up to 36 percent of insurers insolvent, and reinsurance and guaranty funds would be inadequate.
Phillip N. Ben-Zvi, principal-in-charge, Coopers & Lybrand, L.L.P., said that Congress has not heeded the insurance industry's calls for a mechanism to provide federal or other backup despite the fact that insurance industry capital is insufficient to respond to mega-catastrophic losses.
While acknowledging that there are excellent public policy arguments for a catastrophe reserve program, Wayne Upton, senior project manager of the Financial Accounting Standards Board, said that from a GAAP accounting standpoint, catastrophe reserves are a bad idea, because they aren't liabilities and don't belong in the liability section of balance sheets.
For more information, read the 1997 CAS Spring Meeting Press Releases.