The insurance industry is now in uncharted territory. A perfect example is American International Group Inc., one of the world's largest firms. A year ago, it would have been difficult to believe that AIG would require a massive bailout from the federal government. Now U.S. taxpayers own a majority of the New York-based company.
Though most organizations benefited from declining commercial insurance rates during the last few-years, this year the landscape will likely change, as many factors are combining to create a unique scenario for insurers.
What is driving the change? How will the change affect premiums? What can be done to minimize insurance costs?
Looking ahead and having a clear strategy will pay financial executives dividends on their 2009 insurance renewals.
Investment income is down dramatically for nearly all insurance companies, while at the same time, claims activity is up significantly. For example, many insurers had investments in Fannie Mae and Freddie Mac, the mortgage giants seized by the federal government.
In an ideal world, insurance carriers garner a positive return on investments and collect more in overall premiums than they pay out for claims. This generates policy-holder surplus, which represents the positive difference between their assets and the legal obligations to pay on potential claims.
As policyholder surplus erodes, carriers are under pressure to increase rates and premiums. Many carriers reported disappointing third and fourth quarters last year, driving down their yearend financial results. Adding to the situation is the realization that chances for an economic recovery this year appear slim, at best, as the United States recession has worldwide implications, making strong investment returns unlikely anytime soon.
Insurance buyers have benefited from competitive pressures among carriers in recent years. But the flip side of the equation is weakening financial performance. Recent catastrophic losses in the U.S. have added to the woes of the industry Due to last year's sharp upturn in hurricane activity, property losses were significantly higher than in 2007.
This year will be a challenging one in the insurance world due to a weakened economy, Wall Street woes, the subprime fallout and faltering profitability due to competitive pricing and claim losses.
The competitiveness of insurance markets has masked the necessity of stringent risk management. Many insurance buyers have come to expect rate and premium reductions, without significant regard to how risk is being addressed and managed in their day-to-day businesses.
Identifying and quantifying risks will...