Down but far from out: Insurance industry takes a pounding, but ready for more

If anything, the recent tumult which has beset the world has proven the resilience and relevance of the insurance industry. Despite the enormous setbacks caused by a series of disasters, many of them unprecedented, some liquidity remains while increases in the number of policies entered into indicate that consumers and businesses recognise the essential nature of the service.

That’s according to Mike Durek, CEO of ACE South Africa. He points to research from SNL Financial which shows that the first quarter of 2011 was the worst in a decade for the insurance industry. “However, the same study shows that there is a modest increase in the number of policies taken out, of some 2.7%,” he says.

Durek believes this growth confirms the essential role played by insurance companies in helping businesses and consumers to weather the vicissitudes of planet earth.

Pointing out that that insurance industry is a globally-interlinked, Durek says this feature of the business is behind its resilience.

“Events in far-off places like New Zealand, Japan and the United States are by no means free of impact on the South African industry,” he says. “Especially the big insurers are interlinked at some level; indeed, it is partially thanks to this interdependence created by large multinational companies that the enormous financial impacts of these events can be carried.”

For its part ACE Insurance, which has moved its global headquarters from the Cayman Islands, where it was founded, to Zurich in Switzerland, is demonstrating that it is able to maintain sustainability despite repeated and heavy impacts. The company’s chairman and CEO, Evan Greenberg, recently revealed at ACE Insurance is outperforming the market; describing the risk business as ‘volatile’, he notes that ACE was still able to increase its book value in the first quarter.

“Capital strength is what rating agencies and regulators focus on most, and our rating is very important for our position in the financial markets,” Greenberg said in a recent interview in Swiss publication Finanz und Wirtschaft.

Capital adequacy and availability remains the ultimate test of an insurer’s ability to absorb the massive financial impact of a range of consecutive disasters; Greenberg noted that ACE remains focused on growth. “[For this reason] we retain our capital and consistently refrain, for example, from buying back our own shares. We retain capital in order to remain flexible in good times as well as bad.”

Continuing, Durek says despite the setbacks of the first quarter, the insurance industry remains on a sound footing. “Swiss Re, for example, is anticipating flat to moderate premium price increases likely towards the end of 2011 and into 2012. Given that the losses to the industry from the floods in Australia, the earthquake in New Zealand, and the earthquake and tsunami in Japan were now are between $30-bn to $40-bn, this can be taken as an indication of the stability of the industry and its capacity to absorb even repeated catastrophic events.”

Further evidence of this capacity, he notes, is evident in the losses which have resulted from the spate of tornadoes in the USA, with insured losses of up to $6-bn. “Ratings agency AM Best Co has indicated that this is likely to impact on earnings for insurance companies- and not the all-important capital,” he says.

“So, while there is no question that it has been a torrid time for insurers, the industry is well-geared to handle even substantial impacts – and those impacts should serve as an affirmation of the necessity for insurance cover,” Durek concludes.