A Lesson in Insurance/Reinsurance Economics
November 6, 2007Vincent J. Dowling, Jr., (Dowling & Partners, http://www.dowling.com/) an outspoken analyst of the insurance industry, was the keynote speaker at the annual meeting of ARIAS-US* last week. Speaking before an opening session crowd of over 650 arbitrators, company (cedant and reinsurer) representatives, lawyers and industry consultants, Mr. Dowling made a number of thought provoking statements that started the proceedings off to a rollicking start. One of his more interesting observations for the arbitrators present was that reinsurance recoverables as a percentage of policyholder surplus in the US is down from 50% in 2001 to 30% today (perhaps helping to explain the anecdotal perception among the arbitrators present that the number of arbitrations has ebbed the last couple of years). While he regaled the audience with criticisms of the arbitration process, his most provocative comments were aimed at the investment community, concluding that the property/casualty insurance and reinsurance business is and will continue to be a “lousy” business “for the invest-able future.”
For instance, Mr. Dowling stated that:
* Underwriters’ reported financial statements are always wrong.
* Rating Agencies are the de-facto regulators of the industry.
* Investing in the insurance/reinsurance business is like a roach motel – easy to get in but impossible to get out.
* Bermuda is the “Better Mousetrap” for investors because of the regulatory climate and the ability to actually make an adequate return on capital.
* If you want to invest in the insurance business, control the customer – become an intermediary not an underwriter.
* New capital has managed to come in to the industry on short tail business, but has not yet figured out how to come in with enough capital for long tail business.
* We are in a soft market cycle and can expect another round of company insolvencies in the foreseeable future.
All of these statements were supported by lots of charts and schedules, all of which I am sure VJ would be delighted to share with anyone who asks.
* ARIAS-US (http://www.arias-us.org/) is an organization that “promotes improvement of the insurance and reinsurance arbitration process for the international and domestic markets.” I am an ARIAS certified arbitrator and umpire.
What do you think?