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Thursday, April 8, 2010

Commercial property insurers see tougher times

Premiums, returns expected to come under pressure, says FM Global chief

A BUMPER 2009 for commercial property insurers could depress premiums and hurt returns this year, according to Shivan Subramaniam, chairman and CEO of FM Global, a mutual commercial insurer.

The lack of natural disasters and the recovery in financial markets means insurers head into 2010 with very strong balance sheets and underwriting results, Mr Subramaniam said.

For 2009, industry-wide net after-tax income for US property/casualty insurers is expected to have risen more than eight-fold to US$30.6 billion, from US$3.8 billion in 2008, according to reports.

Last month, Fitch Ratings upgraded the outlook on FM Global to ’stable’ from ‘negative’, noting a recovery in the insurer’s capital position. Policy-holder surplus jumped 35 per cent to US$6.2 billion last year thanks to strong earnings and a rebound in investments,

‘You’re almost pushed to write more business, and if everybody does that, the only thing is that prices go down,’ Mr Subramaniam told BT. Falling premiums could hurt insurers badly if even a moderate disaster happens this year, he said. And there has already been a massive earthquake in Chile.

‘Chile could turn out to be a very expensive loss for the industry,’ Mr Subramaniam said. ‘The Chile quake had 600 times more force than Haiti – and Chile is the world centre for copper mining.’ Initial estimates of US$2 billion in insured losses are likely too low, he said.

The threat of climate change could also put a dent in profitability, according to Mr Subramaniam. ‘We can’t really say whether there is climate change or not, but what we do know is there is an increase in frequency and severity of those locations that are exposed to flood, wind and earthquake,’ he said.

That could lead to more losses for the industry. But Mr Subramaniam says FM Global’s method of treating insurance as an engineering problem – using technology to minimise damage and disruption – rather than an actuarial one may help preserve its margins.

‘From an engineering point of view, it doesn’t matter that there are going to be more floods, or larger floods – we can engineer for that,’ he said. Being a mutual company also allows FM Global to absorb more short-term volatility than most publicly listed insurers, he said.

Forecasters see an above average hurricane season this year, on top of the two big earthquakes in Haiti and Chile.

Source : Business Times – 8 Mar 2010

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