Summit News: Don't hold your breath for rate hikes
THE insurance industry should not hold its breath in anticipation of further rate hikes despite some lines already showing signs of firming, according to Andrew Kendrick, chairman and chief executive of ACE European Group.
Kendrick told delegates at the Insurance Day Summit in London that there was an ‘intellectual need’ to increase rates as the recession followed the industry investment and catastrophe losses of last year.
“Industry return on equity (ROE) is currently in the low single digits and it will become even harder to achieve a reasonable ROE because the cost of capital is so high,” he said.
“In 2008 ROE was .5% and the projected ROE for the rest of ’09 is 7.4%. By any standards that is not acceptable.”
As a comparison Kendrick said that in 2001, after the World Trade Center attacks, the industry ROE was -1.2%. “Although it is different circumstances this time around, as it is more from an asset perspective rather than a reserve perspective, we are not that far away from 2001 at present.”
Despite these factors, however, Mr Kendrick said there were no guarantees that firming would continue to hold throughout 2009.
“You have situation such as in offshore energy in the Gulf Of Mexico where rates have gone up but the client doesn’t want to pay the increase,” he said.
He observed that there would be a flight to quality in those lines where he said that ”more than rates mattered” such as multi-line programmes. He defined ‘flight to quality’ as meaning service, expertise, balance sheet strength and geographical indigenous presence.
Kendrick described developments in lines such as UK D&O and European casualty, which he said were still competing on price, as ‘disturbing’.
“An insurance company failure and combined ratios in excess of 100% would probably speed up the firming process,” he added.
“And if you strip away prior period development some lines are already in excess of this so there is more than an intellectual need to increase price.”
“A $30bn-$50bn catastrophe would move the market. A $100m cat would damage it irreparably.”
