The Ten Biggest Events of the Insurance Quarter Century

Reminder: You can still vote until next Tuesday on the Best CEO of the last 25 years. Click the link here and scroll to the poll at the bottom. There is a pretty tight three way race so any additional votes may swing the outcome.

For this week, I am not doing another poll, but I will stay on the theme of “Best of” with my take on the top 10 events in the insurance industry since 2000. I am sure I have forgotten some, so you are welcome to remind me in the comments.

This isn’t a ranking from 1-10. I’ve tried to go mostly chronological, though some events stretch over longer periods.

The 9/11 Hard Market

It’s hard to overstate how significant 9/11 was for the insurance world. There was the horrific immediate impact on employees at Marsh and Aon, the large property losses in New York that changed how commercial property would be written going forward (more focus on terror, BI, T&C wording, cat modeling, etc.), but there were also secondary effects.

Psychologically for insurers, 9/11 was a wake up call. The industry had been underwriting like drunken sailors for too long and had to get sober real quick. A large property cat event led directly to insurers stopping their reckless casualty underwriting. It led to actuaries finally calling BS on their company’s reserves. It led companies to exit lines they had been long term market leaders in.

It’s obviously a shame it took such a tragedy to force the industry to change their behavior, but there is no denying it was the most impactful event of the century.

Asbestos

Simultaneous to the realization that reserves from 90s casualty business were short, the industry also found out its casualty reserves from the 60s (and even beyond) were short!

The explosion in asbestos litigation forced insurers to finally get realistic about their exposure and start addressing their massive reserve shortfalls. Twenty five years later, major insurers are still “paying as they go” for asbestos claims rather than fully reserving for their ultimate exposure.

And for those asking, why didn’t I mention environmental too? Yes, environmental too, though it was the little sister in relation to the asbestos claims.

Katrina

I already wrote about this one at some length but Katrina (along with her sisters Rita and Wilma) was the seminal nat cat of its time. While one can make an argument for Sandy, I’d say Katrina was far more disruptive to pricing models, balance sheets, risk management, etc.

It also highlighted how correlated hurricanes can be in active seasons (the near miss of Rita with Houston showed the importance of reinstatements and managing retentions for multiple events) and that the real disaster scenario for insurers isn’t one mega cat, but two large events back to back.

Spitzer

The Spitzer investigations had far reaching impacts beyond the headlines of the financial settlements or removal of legendary CEOs.

For instance, if the brokers didn’t divest their wholesale brokers, what would Pat Ryan be doing today? Would we have even had a “golden age” of E&S if Aon and Marsh dominated the wholesale space or would the market have developed differently?

And, as we’ll get to below, how different would the AIG story have been if Hank could have settled the FP margin call with Goldman earlier, at a better price?

Auto Ads

Twenty five years ago, we didn’t have auto ads all day long on television. I know that might be hard to remember but it’s true! There may have been an occasional boring State Farm or Allstate ad reminding you why they were a good neighbor/hands, but that was it.

Now, Progressive and GEICO are among the top spending advertisers in the entire country. And for good reason…it works! Progressive’s advertising spend has delivered a ton of growth at attractive margins. It’s been by far the most successful growth strategy in all of insurance, even if we are all sick of it.

Mega Mergers

There were plenty of mergers to choose from but I think the two that most directly changed the landscape were Travelers-St. Paul and Chubb-Ace. Interestingly, both were effectively “reverse mergers” where the smaller company’s management took control and the name of the larger.

Jay Fishman got to return home to Travelers, which he previously ran, and took it to another level solving a succession issue for Travelers while providing Jay the kind of platform he lacked at St. Paul. Evan Greenberg was able to acquire the best brand in insurance while combining Chubb’s retail strength with Ace’s wholesale and reinsurance skills.

I think most would agree the resulting companies are the two biggest power players in commercial lines and helped fill the void left by the decline of AIG. Speaking of which…

The Fall of AIG

In contrast to the successful creation of the modern Travelers and Chubb, there was the fall from grace of AIG.

Out of all the predictions one could have made 25 years ago, I doubt anyone would have had on their bingo card AIG nearly failing and needing a government bailout.

There were many contributing factors (weakening underwriting standards, poor succession planning, underinvestment in technology) but the final blow, ironically, was too much leverage in the non-insurance (i.e. derivatives) business.

Ramifications were far and wide from the sale of jewel assets like AIA and HSB to the new business opportunities created, particularly in the E&S space (from BHSI to small MGAs), to increased federal regulation of insurance to massive market share shifts across many lines.

Tohoku Quake

While we learned in 2005 about correlation of hurricanes, we were reminded about the correlations of earthquakes in 2011. The Ring of Fire led to earthquakes around the world but most potently in Japan with the 9.0 quake in Tohoku causing massive losses of life and property.

While the event didn’t lead to the same market response as Katrina, it arguably exposed greater risks. While insurers are aware of tsunami following quake, it is not modeled well and has the potential to be far worse (see my past concerns about Seattle!). Additionally, the Ring of Fire effect can mean reinsurance reinstatements get exhausted before we even get to hurricane season.

Insurers have gotten complacent about quake in my view. Results from the past 25 years have represented more luck than skill.

The Emergence of Cyber

I’m not exactly sure where to place these last two topics chronologically, but I think they go closer to the end than the beginning.

The growth of cyber as a risk class was certainly a major development. It’s the one truly new risk class that has emerged so far this century and has provided tremendous growth for those carriers brave enough to write it.

Time will tell whether it can be done profitably. As I have written in the past, I am skeptical. The bad guys evolve faster than insurers can. But there is no denying it has become an important risk and one that the industry needs to solve if it wants to find new sources of premium.

ILS

Similar to cyber, ILS has evolved over the time period. Cat bonds were around back in the late 90s, but the growth of ILS as a true competitor to traditional cat exploded over the last 10-15 years.

While ILS has had its ups and downs, along with some structural challenges to navigate, there is no arguing that it has had an enormous impact on how cat risk is managed across the industry and arguably has been the most disruptive change to a single area of insurance.

The standalone cat reinsurer is now a dinosaur, only existing in the fossil record. Many sold out due to the pricing pressure introduced by ILS. Those who remain have morphed into diversified reinsurers or undertaken difficult expansions into insurance to try to manage volatility. That’s largely due to the incursion by ILS.

Final Thoughts

That’s my list. You’re welcome to let me know what I left out. Maybe it was intentional or maybe I just forgot. Personally, I’d probably choose 9/11 or the demise of AIG as the top event.