Carriers, Pandemic and Financials
"When much of the global economy locked down last year, insurers, facing estimated losses of more than $100 billion globally, reached straight for their red pens to strike pandemic coverage from all new business policies." Reuters, May 10, 2021 (as reported in Business Insurance).
$100 billion is an awful lot of money, but not when you look at it in context. In the United States, surplus increased in 2020 to almost $800 billion all by itself. In other words, the United States' P&C insurance companies could, by themselves, fund all pandemic losses for the entire world without collapsing the market. I have no idea how much surplus exists for the entire world's P&C carriers, but I'll guess that the rest of world has at least as much as the U.S. domestic market. $100 billion vs. a $1.6 trillion surplus is 6.25% -- entirely manageable.
I point this out because insurance companies seem to be taking advantage of the press not asking the right proportional questions and/or falling into the same "woe is me" victim psychology, as so much of society has relative to the pandemic, even though they are making an awful lot of money. Every company that is using the pandemic as a general excuse for the hard market needs to be hard pressed to answer this simple question: "If the pandemic caused so many losses, why did you make so much money last year?"
That question has some caveats. The first caveat is that some carriers did not make money last year. One reason some did not make money was because they took the opportunity to create reserves which falls into two categories. The first category is that it was an opportunity to reduce profitability and increase reserves even though reserves were not truly required. Now, I know carriers would never, ever do anything like that intentionally because carrier executives always listen to their actuarial teams (sometimes emoji's say more than words). Sometimes they just make reasonable but wrong decisions and time will tell in both instances. In other cases, carriers truly needed to take reserves because they had too much exposure to the specific lines that are likely problems such as cyber, D&O, and Allied Lines (this is where business income/interruption is classified along with civil unrest).
Another situation is when a carrier has that exposure but is inadequately profitable and cannot take the reserves they need to take. Not every carrier made money last year. 2020 was an interesting year for carriers because some made record profits or near record profits and some lost money -- even though they were writing the same general categories of business.
Knowing in which category a carrier is located, that is: 1) made a lot of money legitimately, 2) made a lot of money but created reserves because management is extremely conservative, 3) made money, but given a high proportion of problematic business, had to create reserves, or 4) lost money because the company is poorly run. Knowing the difference is important.
I do a lot of work helping people, including carriers themselves, to understand in which category any given carrier is located and the differences are pretty amazing. The main point of this article is to emphasize the need to read industry articles in context. $100 billion is a lot of money, but not really when seen in context. A 6% drop in investments, which has happened, would have the same effect on surplus, assuming the portfolio did not bounce back.
Businesses are managed, when managed well, on ratios, not dollars. Ratios provide the context.
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