The global financial crisis of several years ago forever changed the way business looks at itself – as well as the way the public and regulators view business. The outlook of most business leaders has changed from the pre-2007 expected future of unlimited growth to a more somber and practical outlook – with more focus on potential loss of wealth, asset protection, increased scrutiny and higher levels of financial risk.
The near-death experiences and forced restructurings of several large insurance companies provide the best examples of how companies must carefully avoid complicated and constrictive financial structures, if they are to effectively manage operating businesses in the post-crisis financial environment. They also confirm and clarify why new opportunities for restructuring are so important to U.S. property and casualty (P&C) carriers.
Restructurings are more complicated for those companies which operate in regulated industries. For example, increased regulatory scrutiny of the banking industry since the financial crisis has led several large non-bank companies to be designated as SIFIs, or systemically important financial institutions, and undergo restructurings. SIFIs are banks, insurance companies or other financial institutions whose failure might trigger a financial crisis , in the eyes of regulators. Others in financial services are now asking when SIFI-style oversight will become the norm across the industry.
The insurance industry is well aware that increased oversight, ongoing expansion of state regulation and limited restructuring options have created operating issues, increased compliance costs and raised additional concerns that consume management time and attention.
A.M. Best A&E study
Recent asbestos and environmental (A&E) loss development experience clearly illustrates the risks confronting the P&C insurance industry. In a recent study, A.M. Best estimated the industry’s ultimate net liabilities have increased to $85 billion for asbestos and $42 billion for environmental. Given current industry reserves, this represents an unfunded liability of $7 billion for asbestos and $4 billion for environmental. A.M. Best also reported that total A&E incurred losses (paid claims plus reserves) have increased in five of the last seven years, including a 16% increase in 20132 . Many P&C insurers and reinsurers with runoff business struggle with retaining these risks on their balance sheets.
Current state of the U.S. runoff market
Both small P&C companies and global insurance groups have a need for effective restructuring tools to optimize capital utilization, as well as to manage runoff liabilities. Three of the larger insurer groups that represented 50% of the A&E losses in 2013 have engaged in large loss portfolio transfers with Berkshire Hathaway’s National Indemnity. These larger insurance groups can afford to enter into such sophisticated reinsurance transactions, but what about the rest of the insurance industry? There are limited runoff options for many small and mid-size insurance companies.
For the full article, refer to page 6 in the Winter 2015 issue. https://www.airroc.org/assets/docs/matters/airroc_matters_winter_2015_vol_11_no_4%201.pdf