Are Property Insurers concerned with offering Insurance any more?

Are property insurers actually interested, primarily, in Insurance? I think that the resounding answer to this question is ‘no they are not’.

This might sound an outrageous, even foolish statement to make, but I genuinely believe that the Primary function of an Insurer today is to make returns to their Capital providers and Insurance, whilst being the means by which they offer those returns, comes in a distant second in terms of primary function.

Capital providers are roaming the financial market place looking for the best return on their investment.

Capital providers are roaming the financial market place looking for the best return on their investment. In a world of low interest rates an Insurance Company offers an attractive place to put your money BUT Insurance returns come with significant exposures in terms of Fires and Hurricanes and Wild Fires and Earthquakes. So Capital providers offer their financial investment with strings – lower the risk, raise deductibles, reduce coverages, raise prices. Capital can flow into a company easily and it can flow out just as easily.

What is the Insurance mantra repeated with zombie like tones? ‘Capital is financial strength, Capital gives high Credit Ratings, Capital is all’ But Capital is a double edged sword, I would even argue that it is an illusion. Insurers don’t have Capital in order to physically use it, quite the contrary it is there to say ‘I don’t need it, but if I absolutely have to pay your claims look at my resources’. But if you see an insurer dipping into their Capital then the alarm bells will start ringing off the wall. Insurers pay claims out of Premiums not with Capital. If premiums are insufficient then the insurer is in trouble.

If a Capital provider sees the Capital it provides being spent on Insurance claims the reaction isn’t ‘How wonderful my investment is being eroded by claims’ the reaction is ‘How quickly can I get my money out of this commitment?’.

Insurers are moving steadily away from risk taking

Therefore, in response Insurers are moving steadily away from risk taking. They are no longer interested in insuring frequency losses, they want to become an Insurer of severity not frequency. They are moving away from giving the client the coverage that they need – the small to midsize claims and are offering only coverage for Hurricanes or other high intensity Catastrophes.

Why? Well Insurers can lay off Catastrophe claims into the Reinsurance Market and so an Insurer suddenly becomes VERY attractive indeed to an Investor. ‘Invest your money with us, we no longer pay small claims and for the severe exposures we buy Reinsurance, you cannot lose’ it’s a powerfully attractive proposition.

Remember that Capital gives Credit Ratings so the higher the Credit Rating the more business an Insurer can do, the higher the returns, which in turn generates more investment. But Capital is an illusion, no insurer seeks to dip into Capital, by the time an Insurer is spending Capital to pay claims it is arguably already too late and the Insurer is probably doomed. Capital must be protected at all costs, even at the cost of no longer offering frequency insurance to clients.

Into this gap the Captive market must flow

Into this gap the Captive market must flow, offering clients effective solutions to frequency issues. Insurers are investment vehicles for Capital, they are not interested in the fundamentals of the Industry in which they purport to be a part.

Roland Horton

Hartwell Insurance, Nashville, TN