EWI’s Outlook for 2011 for Insurance, Reinsurance and Financial Markets

- authored by Steve McElhiney, CPCU, President of EWI

As we move into 2011, EWI offers the following insights into the insurance, reinsurance, and financial markets as well as various economic trends.

We share the sentiments of most industry pundits that we are in a continuing soft insurance and reinsurance market as a result of more than adequate market capacity coupled with resurgent investment asset valuations (from both fixed income instruments in the generationally low interest rate environment buoyed by “Q.E. II” and soaring equity market valuations) and a manageable 2010 CAT environment. Despite a fairly active 2010 global CAT environment, the North American continent has seen fairly benign CAT activity. Global capacity remains more than adequate to support global insurance and reinsurance demand; the “supply/demand” dynamic continues to favor buyers of the insurance product into 2011.

A key potential “game changer” is a global Mega-CAT event in 2011. The unusually quiet California EQ environment, from a long-term historical perspective, would appear to be an anomaly; a major EQ event in California (such as recurrences of historically significant fault movements along the San Andreas, Elysian, or Hayward faults) would be a reinsurance market turning event. Similarly, there are literally dozens of potential Mega-CAT events that could occur in the United States, or globally, that would serve to consume available capacity and serve to turn the market.

On balance, we see many parallels of the current insurance market to that of the late 1990’s; continued price softening year-over-year (5%+ average price declines in 2011 are forecast across most lines). We see ample reinsurance capacity for most accounts that we present to reinsurers; including start-ups and management “lift-out” units, captive and alternative risk vehicles, and MGA program deals.

It is our view that the US and global economies are, clearly, in the early stages of a full economic recovery from the 2008 and 2009 lows. While this will serve to increase ratable insurance premiums in the US, there is also more than capacity to support these risks and no significant market pricing impact will be evident as a result in 2011.

Longer-term, we see those global insurance organizations that have a significant presence in the emerging markets of China, India, and Brazil; and to a lesser extent, Southeast Asia and certain Persian Gulf countries will continue to show overall financial outperformance in comparison to those insurance entities that are focused exclusively upon the more mature economies of the US, EU and Japan. This trend will continue in 2011 and beyond.

These emerging countries are in secular growth cycles that will extend over a generation. Rapid technological, energy, and economic development in these regions will drive demand for insurance products that will also evolve as the underlying societies become increasingly advanced. More insurance product for emerging lines of coverage will be demanded as these countries become more advanced over time.

We do not subscribe to the view that a “double dip” economic down-turn is likely in 2011 in the absence of a major catalyst event (such as a geopolitical outbreak or a major terrorist event). There is ample global liquidity to withstand any economic pressure and the systemic effects of 2008 will not likely occur again within a generation.

Thus, we see slow and gradual economic improvement as the US economy struggles to overcome major structural unemployment and global competitiveness issues with unemployment showing a very “sticky” level over the next few years.

Certain US states will show improved economic results more quickly than the nation at large due to shifting economic activity surrounding global trade and overall relative competitiveness, in this new global framework.

The “main event” in 2011 in the United States will be the continued impact of budgetary shortfalls in various states and municipalities given funding constraints and swelling post-employment liabilities. This will also coincide with significant political tension on a national level as certain states seek federal funding and the Congress will not accommodate these requests, in our view, in the current political environment. Thus, several states and municipalities may face severe budgetary constraints that could affect debt service and ongoing pension obligation requirements. Interest rate spreads on state governmental obligations will continue to widen. This is a trend that will begin in 2011 and evolve over the next few years as various states face the impact of diminished growth, contraction in core industries, and swelling pension liabilities.

The generally positive economic trends that are underway will serve to further support US equity market valuations in 2011 with only slight market pull backs throughout the year in reaction to macroeconomic events that may occur, such in the Euro-zone. We see the S&P 500 continuing to perform in a trading range of between 1,000 and 1,350 over 2011.

The situation in Spain, Italy, and to a lesser extent, Portugal will continue to be problematic and will cause continued political tension with relatively stronger Euro-zone export driven economies such as Germany. The Euro will continue to show weakness in this framework during 2011.

An improving export environment, coupled with an increased US focus on fiscal restraint and deficit reductions, will serve to give some short-term strengthening of the US Dollar which we forecast will improve relative to most currencies.

Interest rates will, invariably, increase during 2011 in concert with an improving economy and improved market liquidity and increased loan demand. Any such increases in 2011 will still keep rates at historically low levels.

We do not subscribe to the notion of run-away long-term inflation in the U.S. given heightened pressure for budgetary restraint and the favorable impact of increased tax receipts in concert with an improving economy. The US economy remains a stalwart in all sectors and will continue to the global leader in 2011 and beyond. The current level of the national debt and budgetary deficits is most concerning; however; the depth of the economic contraction of the financial crisis (and the massive deflationary impact) will continue to put a damper on significant price inflation.

As respects insurance carriers, we feel that fixed income returns will be under pressure in 2011 and beyond and the long-term favorable capital trend of unrealized fixed income appreciation from lowered interest rates will be abated. Insurance companies will also face interest rate reinvestment risk in 2011 as bonds with nominal rates of 5 percent or more are reinvested at much lower rates, in the short-run.

The spiked pricing trends in 2010 of certain commodity prices is distressing and is reaching the level where economic expansion could be threatened; particularly, as respects the price of oil and food. A return to $4.00 to $5.00 per gallon gasoline will inhibit GDP growth markedly. We feel that a strengthening US Dollar and a slight decline in the demand for energy in China will contain this threat.

On balance, we forecast the pricing of certain global commodities will show a slower rate of growth in 2011 given potential constraints in the Chinese economy that are becoming evident in reaction to a potential asset “bubble” and recent governmental restraints.

Ladder Safety Tips from EWI Risk Management

- by Michael McKee
The holiday season ushers in wonderful celebrations and events. The joy of gift exchanges, parties, company events and family reunions make the season special. Many of us (especially me) look forward to the time of year when we can express our inner Clark Griswold and turn our houses into a twinkling light show! However, every year these happy times are ruined for thousands of individuals and families by injuries and deaths caused by unsafe ladder practices. Most of us don’t use ladders on a regular basis and certainly not at heights required to string our merriment. We should appreciate the risk of working at heights and take appropriate steps to negate and manage that risk while hanging and taking down that electronic holiday cheer. Here are some tried and true safety tips for working on ladders:

o Climb slowly and steadily while always facing the ladder. Many people are hurt falling when they are distracted or make sudden movements.

o Don’t lean off to the side to reach something. The ladder’s center of gravity will move with you as you move up in height. Leaning to the side dramatically affects this and can cause the ladder to shift and fall. The ladder should have four points of contact with the working surface and downward pressure on each leg should be proportional.

o Ladder should always be based on a level surface. Never stack ladders or prop a ladder on top of another object.

o Wear rubber soled shoes and be mindful of slippery rungs and footwear.

o Don’t try and carry heavy or bulky items when you climb. You should always maintain three points of contact with the ladder (two feet and one hand or two hands and one foot). Tow loads on a tow line or have it handed up once in position. If using fall protection equipment such as lifelines, lanyards, and harnesses, seek proper training in the use and selection of that equipment. It must be assembled properly to work properly.

o All ladders are not equal. Differing construction defines its weight and working height capacities. If you have a ladder rated for 200 lbs and you weigh 260, get a different ladder or hire a pro to hang the lights for you (you can go on a diet next year).

o If using a ladder around electrical lines it should be wood or fiberglass. Aluminum is a wonderful electrical conduit and will flow energy to the nearest grounding source (you).

o Be mindful of weather conditions. Winds blow harder the higher you are from the ground so what seems like a light breeze on your porch may be very unnerving at 20-feet. Your vision should be clear so clear sunny days are a must.

o Don’t drink and climb! This may seem silly to say but many people are injured each year when they have a couple of drinks and decide to adjust a light bulb. Alcohol and drugs not only affects your decision making but also your balance and vision. If you need a drink to get the courage to hang the lights, then hire a professional to do your light work!