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2002 CAS Reinsurance Seminar

2002 CAS Reinsurance Seminar. Property & Casualty Insurance: An Industry Structured for Low Profits?. Introduction. Terrible year for the property & casualty industry Adverse development resulting from long soft market Attack on the World Trade Center Enron and other large D&O related losses

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2002 CAS Reinsurance Seminar

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  1. 2002 CAS Reinsurance Seminar Property & Casualty Insurance: An Industry Structured for Low Profits?

  2. Introduction • Terrible year for the property & casualty industry • Adverse development resulting from long soft market • Attack on the World Trade Center • Enron and other large D&O related losses • P&C Industry Roe's have generally been lower than those in other industries.

  3. Structural Weaknesses of Industry • Not knowing the true cost of the products sold • Exposure to events not contemplated in the underwriting or rating process. • Giving too much credit for good experience and ignoring exposure.

  4. Buffett Letter To Shareholders • P&C industry winners stick to three key principals • They only accept risks that they can properly evaluate and that produce an expected profit after evaluating all relevant factors, including remote loss scenarios. • They limit their aggregations from single & related events. “They ceaselessly search for possible correlation among seemingly unrelated risks.” • They avoid business involving moral risk. “Trying to write good contracts with bad people doesn’t work.” • WTC loss showed that General Re and the industry violated the first two principals.

  5. Buffett on Experience and Exposure Rating • Property pricing only considered perils experienced in recent years: wind, fire, & earthquake. • “The industry made a fundamental underwriting mistake by focusing on experience, rather than exposure, thereby assuming a huge terrorism risk for which we received no premium.” • “At times using experience as a guide to pricing is not only useless but actually dangerous.” • D&O experience was great when stocks were rising to ridiculous highs in the mid 1990’s, “but that is when exposure is exploding” due to “earnings manipulation and exposure due to excess valuations.”

  6. Buffett’s Comments on Terrorism • “The industry has always found it costly to ignore new exposures…terrorism could bankrupt the industry.” • The probability of a significant nuclear, biological or chemical attack is “likely low at present, but not zero.” • Probability of such an attack is “increasing in an irregular immeasurable way as knowledge and materials become more available to those who wish us ill.” • Close to worst case scenario could involve $1 trillion in damage. Without government help, that would bankrupt the industry. • Until now the industry has “blithely assumed the financial consequences” of these risks.

  7. Introduction of Speakers • Panelists work in the investment industry • They will cover the following topics (and some others) • Structural weaknesses & recent problems of the P&C industry • The capital markets view of the industry • Strategies that (re)insurers and investors can use to improve their chances of making money

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