Known unknowns confront the insurance industry
Avian flu, terrorism and natural disasters are the unknown risks that insurance companies confront, said J. Barry Griswell, CEO of Principal Financial Group who said that the most severe natural catastrophes in the U.S. had occurred in unlikely regions -- the worst earthquake was in Missouri, the most severe hurricane in New England, the heaviest flooding in Pennsylvania.
You need the mindset of expected the unexpected, he added in a presentation to the International Insurance Society in Chicago this week.
"Make sure you have adequate discipline. Don't just measure and understand, do something about it, and stay within the risk parameters." The insurance industry has too often acted like lemmings, pricing irrationally to grow the business.
And what keeps him up at night?
Regulatory risk.
“There is enormous risk in the way insurance companies, especially life, are regulated in the US. He cited changes in reserving schemes, intervention by attorneys general, the myriad state regulators and lack of federal regulation, and the entry of other financial firms that are taking profits from insurance industry mis-pricing through schemes like insuring the lives of strangers as an investment strategy. No investment firm is going to let a life policy on a stranger lapse, yet the insurance industry prices policies with the expectation that a certain percentage will be dropped.
Only federal regulation can address some of the key issues facing the industry.
State regulators are not going to give up without a fight. Walter Bell, commissioner of the Alabama Department of Insurance noted that the industry is becoming increasingly complex and is using a host of new financial instruments. Yet he still argued that state insurance departments are the ones to regulate this increasing sophistication. That just doesn’t make sense.
