The U.S. economy is sputtering. It grew just 1.9% in the fourth quarter of 2016. The total output of goods and services ended up below the 2.1% average we’ve seen since 2010.
But Donald Trump is president now and judging by the Dow hitting over 20,000 last week, business thinks that might change. Maybe.
Insurers at the Insurance Information Institute’s (I.I.I.) 21st Annual Property and Casualty Insurance Joint Industry Forum have expressed what is being deemed, “cautious optimism.”
New England Asset Management CEO William Rotatori addressed the elephant in the room and said one of the things to watch is what the Trump administration brings to the economic table.
“There’s a level of uncertainty that doesn’t necessarily correlate well to higher levels of activity. There are some trends already in place that are going to be tough to change, such as the levels of debt in the overall economy, the aging population and the labor force participation rates that are still in secular declines. These are things the new administration is walking into, and I’m not sure it’s going to change that trajectory,” he said.
Risk management — Rotatori added — is key to financial success in 2017. He predicts the Federal Reserve will continue to “normalize” interest rates which means an end to the bond bull market. And he said look for changes in taxes, healthcare and trade policies.
“It’s going to be a year more so than other years where it won’t be smooth, straightforward or easy. Tactical positioning throughout the year will be a greater source of value added than it has been in prior years,” Rotatori concluded.
When it comes to opportunity, Dowling & Partners partner Gary Ranson said mergers and acquisitions top the list.
“One of the interesting things about the deals that have happened over the last few years is that there really haven’t been a lot of acquisitions of U.S. companies by U.S. companies of any significance. Those outside the U.S. have an advantage coming in to purchase a U.S. company because of the inefficient tax structure of the U.S. today. With the new administration’s potential change in taxes, all of a sudden, the U.S. can be back in the game. If there are a lot more companies competing for any given acquisition, then U.S. companies will have a better economic view to allow them to do deals…It sort of levels the playing field,” he said.
Dr. Steven Weisbart — the I.I.I. chief economist — said 50% of those polled say mergers and acquisitions are needed because of economy of scale.
“Size can bring economies of scale when certain costs, such as regulatory costs, are increasing, Companies are also concerned about the need to diversity across product lines. Lack of diversification could result in highly volatile earnings and decreasing profitability for insurers.” he said and noted 27% of the attendees raised that issue.
Barclays managing director Jay Gelb is one of the 200 members of the industry who showed up. Gelb thinks one of the biggest challenges insurers will have is excess capital. His firm’s research said there is $165 billion available and Gelb said that’s about 25% over-capitalization.
“That is essentially the equivalent of four Hurricane Katrinas happening at once. Obviously, we never want that to happen, and it’s highly unlikely, but I think it will be a tough road from a profitability standpoint for the next couple of years,” he said.
Gelb and Barclays also predict insurers will find if very hard to avoid — at the very least — moderate underwriting losses.
Going forward, he stated he expects it will be difficult to avoid at least moderate underwriting losses. As catastrophe losses saw a relatively meaningful increase in 2016 compared to prior years, underwriting losses were negatively impacted, he said.
Most panelists loved the idea of the lower tax rates and regulatory reform promised by Trump and congressional Republican leadership.
As for trends:
• 55% expect commercial lines to grow more than personal lines in 2017
• 88% think cyber insurance will grow faster than other P&C lines
I.I.I.’s Weisbart said, “This is not surprising given businesses within personal data-driven industries such as health care, finance and banking, retail, and communications view cyber risk as a real threat. Growth in the cyber insurance market will also be driven by increasing demand for business interruption coverage.”
What Congress is going to do in 2017 also piqued the interest of attendees:
• 45% want Dodd-Frank’s systemically important financial institution (SIFI) designation done away with or reformed
• Others want the Federal Insurance Office (FIO) done away with completely
• Many want the Financial Stability Oversight Council (FSOC) done away with
As for the industry:
• 43% are focused on attracting new talent to the dwindling insurance workforce
• 23% are enhancing technology
• 23% worry about the cost of regulation and complexity of doing business
While insurance representatives attending the I.I.I. event are fairly positive, Wells Fargo’s annual insurance survey might bring them back to Earth. It says insurers will likely see a 10% drop in property and casualty prices overall.
Doug O’Brien is the head of Wells Fargo’s Casualty and Alternative Risk Group. He put the survey in perspective.
“In the property and casualty segment, the market will continue to see rate reductions for the majority of customers, although slightly lower than prior years. Potential changes to the Affordable Care Act could also impact workers’ liability, as injured workers may file more workers’ compensation claims in lieu of healthcare claims,” O’Brien concluded.
Source links: Insurance Journal — link 1, link 2, Insurance Business America, The Washington Post