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Insurers Focus on Underwriting Discipline After 2011's Catastrophes

An unprecedented year of catastrophe events at home and abroad, combined with a low interest rate environment pressuring investment income, is pushing insurers to be better underwriters, carrier CEOs say.

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While insurers don't necessarily expect the volume and ferocity of catastrophe events seen in 2011 to repeat, the several notable ones that occurred indicate that it is time to focus on fundamentals once again, carrier CEOs said in a panel discussion at yesterday's 2012 Property/Casualty Insurance Joint Industry Forum, held at the Waldorf-Astoria hotel in New York.

"You can't rely solely on investment results to get what you need [financially]," Fireman's Fund president and CEO Lori Dickerson Fouché said. "Underwriting discipline is one way" to offset a tough investment environment, she continued.

"When I think about the challenges we face, it's making underwriting profit," added Ohio Mutual Insurance Group president and CEO Jim Kennedy. "At the end of the day our job is to be financially impregnable. We've got to be great underwriters. Weather will come and go, but our core operations will be here in and out."

[Check out our list of four reasons 2011 was so unique from a catastrophe standpoint.]

It was "the year of non-modeled CATs," Liberty Mutual president and CEO David Long said. While the industry did a good job on the whole, he continued, catastrophes exposed the fact that some lines of business are "fundamentally underpriced."

"We need to do much better data and analytics on aggregation of commercial risks," Long explained. "We look at low-frequency, high-severity storms but not the opposite. Now we're doing the analytical work on that."

FM Global president and CEO Shivan Subramaniam asserted that one of the most difficult aspects of commercial insurance to price is the manufacturing supply chain. When crises such as the Japan earthquake and Thailand floods hit crucial sectors of insureds' supply chains, the effects — and losses — mount for months after the initial cleanup.

"Supply chain losses tend to have long tails," Subramaniam explained. "It becomes difficult to provide capacity at a reasonable price."

[What technology solutions did insurers adopt to respond to 2011's tornadoes and earthquakes? Chartis, USAA, Farmers and North Carolina Farm Bureau share their newest tools.]

Eric Smith, head of the Americas division for Swiss Re, said that all these disruptions led to an unpleasant truth for insurers looking to renew their reinsurance contracts: higher rates.

"There's two ways to solve the low interest rate environment: one is rates and the other is underwriting," Smith said. "We've got to be great at underwriting, but we believe rates have to move up."

But while this drove Swiss Re's capacity down somewhat, the January 1 renewal season "was orderly," he added.

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio

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