Copying and distributing are prohibited without permission of the publisher
Beware the socialisation of risk, warns PCI CEO
27 October 2008
The global financial crisis, future regulation of the insurance industry, and the inadequacy of US state wind pools will be just some of the talking points at this year's Property Casualty Insurers Association of America (PCI) conference that starts today.
The global financial crisis, future regulation of the insurance industry, and the inadequacy of US state wind pools will be just some of the talking points at this year's Property Casualty Insurers Association of America (PCI) conference that starts today, according to David Sampson, president and CEO of PCI.
One of the biggest areas of concern will be how the US government's overhaul of the financial services industry is going to affect insurers. "It has been exclusively said by the chairman of the House Financial Services Committee that what he plans on producing out of the House next year will be the greatest overhaul of the financial services regulation since the 1933 and 1934 reforms that were put in place in the midst of the Great Depression," says Sampson.
Following American International Group (AIG)'s $85bn bailout by the US Federal government further regulation of insurers has become increasingly likely. Some people have used AIG's problems to argue in favour of an optional federal charter, which would enable insurers to select federal regulation over state regulation. But Sampson expects regulatory reform to go even further than this.
"The debate is going to be fundamentally different than in the past when it was a case of federal regulation versus state regulation," he says. "This raises concerns for insurers. We don't want to see something happen in a regulatory overhaul that could lead to a less competitive environment because competition is what gives policyholders more options and better pricing. We don't want to see a regulatory environment that leads to increased socialisation of risk, where the federal government is taking on more of the risk."
Sampson cites proposals for a national catastrophe fund as one example of the socialisation of risk. "We are very concerned about a number of state cat funds out there that have recently been shown to be under-funded," says Sampson. "A national catastrophe fund is just these individual state funds writ large. The problem is these funds not having actuarially-sound pricing and underwriting. Take the National Flood Insurance Program – there's a program that is $18bn to $19bn in debt, not writing actuarially sound prices and now you have a case where they want to add wind cover to that program, which would drive out private capital and push more risk on the government."
One of the main problems with catastrophe funds is that they offer subsidised rates well below the technical level. Then, when a big catastrophe hits, they cannot afford to pay the claims and end up levying assessments on the private insurers. "This is something we will be very concerned about and it is a subject the industry will discuss with the next Congress," says Sampson.