Insurance leadership for the new normal
“The financial crisis since the third quarter of 2008 represents the most significant financial shock we’ve experienced in the last 60 years,” says Clem Booth, Member of the Management Board at Allianz SE. He was commenting as the guest of honour at The Insurance Conference, held in Sun City, 23/26 May 2010. The Insurance Conference is a joint initiative between the Insurance Institute of South Africa (IISA), South African Insurance Association (SAIA) and the Financial Intermediaries Association (FIA).
As the curtain drops on the so-called ‘sub-prime’ crisis governments around the world are counting the cost of various financial countermeasures. Their unprecedented bailouts and economic intervention resulted in the threat of a global financial system meltdown being replaced with an equally worrying sovereign debt crisis. Countries such as Britain and Greece have accumulated vast amounts of public debt, and it’s going to take years for them to re-balance their budgets. “The age of austerity is certainly upon us, whether in the US or Europe,” notes Booth.
The road to financial ruin
To know where we’re going, we must first know where we’ve been. Booth singles out three factors that contributed to the recent financial system hiccup. Top of the list is low interest rates. The US Federal Reserve (and other central banks) fuelled a credit bubble by repeatedly cutting rates, encouraging reckless credit extension and lending. Savings rates in the US and other debt-addicted countries plummeted as a result. The second factor is the so-called “hurt mentality” that infected the US banking and financial services sector. Companies and investors expected never-ending increases in revenue and return, and paid bonuses that were totally detached from reality. And the third: “A slavish belief in quantitative risk modelling.” Common sense went out the window and questionable financial models were trusted blindly – a clear demonstration of the ‘rubbish in / rubbish out’ phenomenon.
The new normal
The post-recession financial landscape is totally different, and a number of economists and fund managers have coined the term ‘new normal’ to define today’s return expectations. They point out that shareholders can forget the artificial boom times that prevailed in the early part of the 21st Century. South African investors, for example, cannot expect a repeat of the equity returns achieved between 2002 and 2007. They’ll have to get used to smaller real returns.
Companies doing business in the ‘new normal’ will have to accept higher costs of capital, lower growth, increased regulation, more consumer protection and rising risk aversion. In the US, UK and other Western economies they will also have to do business under the cloud of higher inflation – Booth notes inflation is already creeping upwards of 2.7% in the UK. All of these factors will make it difficult for insurance companies to generate acceptable yield.
On the global stage the ‘new normal’ includes the ongoing (if not permanent) shift in power from the traditional Western economy to emerging markets, led by China. It also necessitates fiscal discipline from countries in the Euro-zone, where sovereign debt could take years to work out of the system.
Insurance industry in good shape
“The insurance industry emerged from the crisis in reasonably good shape,” says Booth. A miniscule $98bn was written off in the insurance space versus massive amounts at banks and financial services businesses. And when you exclude AIG (the largest single insurance loss) the situation looks even better. How will insurance companies survive these difficult times? Booth says the recipe for success is simple. Insurers must maintain strong capital bases, diversify their investment portfolios, maintain underwriting discipline and excellence, and remain customer focused.
There are also numerous positive mid-term effects attributable to the crisis. Insurers should benefit from continued growth in emerging markets (Sanlam in India, Discovery in China and Metropolitan in Africa), new markets and trends, and increasing savings rates in many countries. Under these effects the insurance premium cycle is likely to harden over the next one to three years.
Editor’s thoughts: One of the consequences of the financial crisis will be increased regulation. We believe properly implemented regulation could reduce the risk of future stock market bubbles and smooth long-term market returns. Are you ready to invest in this so-called ‘new normal’ environment? Add your comment below, or send it to gareth@fanews.co.za
