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How long can a good thing last?

How Long Can a Good Thing Last?

Since the major British insurers reported poor results for the first nine months of 1989, does this mean that tough times are ahead for insurance buyers? Bad though the results are, it seems that buyers need not worry too much about a hardening market--at least not yet.

The high number of weather losses in the United States and the increased claims costs in the United Kingdom cut pre-tax profits at Commercial Union by 28 percent in the first nine months of 1989. Hurricane Hugo alone cost the company 20 million [pounds]. Pre-tax profits tumbled to 110.3 million [pounds] from 152.8 million [pounds], while net profits fell to 60.7 million [pounds] from 88.8 million [pounds].

Commercial Union said weather losses in the U.S. were at their highest level in 25 years, costing the company 17 million [pounds] more than in the first nine months of 1988. The group underwriting loss worsened to 168.6 million [pounds] from 101 million [pounds], but this was also partly due to a deterioration in the U.K.

A 63 million [pounds] loss from Hurricane Hugo also took a heavy toll on the nine-months results of General Accident. Pre-tax profits for the period were cut to 136.7 million [pounds] from 214.9 million [pounds] a year ago, while for the last three months, profits fell to 12.6 million [pounds] from 68.7 million [pounds].

Royal Insurance lost 40 million [pounds] from Hugo combined with a large rise in U.K. subsidence claims, the loss knocked pre-tax profits down to 125.1 million [pounds] from 140 million [pounds].

Shouldn't these results translate into a tougher market for buyers? Perhaps they ought to, but there is no guarantee. The British market is largely driven by events in the United States. The U.S. insurance industry's capital stands at about $125 billion, giving an adequate solvency margin of 60 percent when related to 1989 premium income of $205 billion to $210 billion. Losses from the two recent catastrophes, Hugo and the San Francisco earthquake, have been estimated at $10 billion. After-tax relief has drastically reduced the cost, being paid by non-U.S. reinsurers. The U.S. market therefore might steady but probably will not harden.

In the United Kingdom, the bad results of insurers might encourage them to buy more reinsurance--they have bought very little in recent years--and catastrophe reinsurance cover will now cost considerably more. But given the relatively small amount of reinsurance purchased, it is unlikely to impact primary rates.

In 1988, the Piper Alpha oil platform loss, costing more than $1 billion, had little impact on the fairly small marine market, and aviation rates continue to be soft despite deteriorating loss experience.

Perhaps the most reassuring sign from the buyers' point of view is the enthusiasm with which London market insurers are signing up to join the new London Underwriting Centre. Lloyd's international brokers are enthusiastic about the new insurance center, a rival to Lloyd's, because it will not only make their lives easier by putting many of the companies under one roof but also makes the London market even more competitive.

The London Underwriting Centre is mostly for non-marine insurance; as such it will complement the existing company-owned marine center, the Institute of London Underwriters (ILU). It is being developed by the Prudential and will be run by Market Building Ltd., which has about 20 insurance company shareholders. Its 300,000 square feet of office space is about the same as Lloyd's, which is nearly twice the size of the ILU, and will house some 85 company underwriters.

Vic Blake, chairman of CNA Re and of Market Building, says the center will not be confined to reinsurance. "It is for any business which is deemed to be London market business or London slip business." He thinks it may produce new capacity because it will encourage the underwriters going into it to reassess, positively, their London role. For example, British composites like Commercial Union, Royal, General Accident and Sun Alliance have a profile in London that is less than their size suggests it ought to be. So one can view their move into this building as a plan to take a bigger position in London.

"Also, any foreign companies which may be thinking of coming to London may take heart from the expression of confidence by the composites and take the plunge," he said.

The mood does not seem right in London for a change to a hard market. In a paradoxical way, the two recent disasters have reinforced the prevailing complacency. It seems as if underwriters think that if this was the big California earthquake, then it was not so bad, after all. Maybe they believe that there is not likely to be another big quake for a very long time. Trouble is, it was not the big one and that, the statisticians maintain, may hit the San Francisco Bay area in the next 20 to 30 years. According to some, there is a 50 percent chance of a major earthquake in San Francisco in the next 30 years and an almost 100 percent chance of one on the East Coast by 2010.

The buyers should make hay while the sun shines.

Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Limited.
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Title Annotation:British insurers
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Jan 1, 1990
Previous Article:The importance of objectives in risk management.
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