Uncertainty Around U.S. Trade Policy

Uncertainty is "a way of life" for insurers

"There's certainly a lot of uncertainty," said our first external speaker, Alan Schnitzer, chairman and CEO of The Travelers Cos. Inc.

This uncertainty doesn't alter Travelers' strategy though, Schnitzer said, because "running this business for uncertainty is just a way of life for us." CEOs from life, property/casualty (P/C), brokers, and reinsurance echoed this view across both days of the conference.

From a broker's perspective, Arthur J. Gallagher & Co. Chairman and CEO J. Patrick Gallagher, Jr. noted that insurance remains "an incredibly important focus of the leadership teams of most of our clients." He emphasized that the broker's advisory role becomes even more critical during periods of uncertainty, helping clients navigate insurance-related decisions in an evolving landscape.

"Day to day, we're pretty much in the business of managing risk and uncertainty," said Carl Lindner III, Co-CEO of American Financial Group Inc.

"We actually like complex environments," added Tony Cheng, president and CEO of Reinsurance Group of America Inc. (RGA), because the uncertainty spurs demand for the long-term benefits that life insurers provide, and thereby life insurers' demand for reinsurance.

Despite their optimism, uncertainty is the main reason our sector view for life insurance is stable, not positive, said Carmi Margalit, S&P Global Ratings managing director and life insurance sector lead. A possible recession or economic slowdown could put insurers' investment portfolios at risk.

S&P Global Ratings Global Chief Economist Paul Gruenwald noted that we don't have a recession in our baseline view. However, he also said, it's the uncertainty--and associated volatility--driving our forecast changes, not necessarily any specific policy.

Uncertainty Around AI And Cyber Risks

Panelists discussed uncertainty around the pace of change

The rapid pace of technological change was a risk on the minds of many of our CEOs and Selective Insurance Group Inc.'s Chief Risk Officer (CRO) Christopher Cunniff. And this "daunting" pace will "do nothing but accelerate with AI," said Securian Financial Group Inc. Chairman, President, and CEO Christopher Hilger.

Gallagher said the industry has become "smarter" since he began, but AI is not going to get rid of human insight. Athene Holding Ltd. CRO Douglas Niemann thinks "AI will be an awesome tool across all of humanity," including risk officers.

Cunniff and RGA CEO Cheng noted the dual risks of moving too slowly or too quickly with AI. Schnitzer remarked on the pace of not just technological innovation, but adoption. As a result, he said, insurers need to think about how their role in the value chain could evolve and ensure they're investing in the capabilities they'll need for the future.

We're also keeping an eye on AI, tech, and cyber risks for P/C and life insurers.

Uncertainty Around Private Credit

The main concerns around private credit tend to be its potential illiquidity, complexity, and opacity. While we're continuing to monitor the trend, we believe the industry currently has a small but growing allocation to private credit.

What's the appropriate allocation?

Life insurance CEO panelists intended to keep private credit a small portion of their balance sheets: Penn Mutual Life Insurance Co. Chairman, President, and CEO David O'Malley said his company has a maximum allowance of 10% and is currently under 5%. Securian's Hilger was comfortable with 16%-17% of very highly rated private credit--but "if I don't understand it, we're not going there," he quipped.

Blackstone Inc. Credit and Insurance Head of Insurance and Multi-Asset Investment-Grade Asset Allocation David Watters sees P/C clients starting in the low single digits and going to the high single digits in their allocations. Likewise, Cunniff said Selective is "north of 5%."

What's the appropriate risk?

Our investment professional panelists emphasized that most of their private credit portfolios are investment-grade. Blackstone's Watters also said he would "push back on the notion that private credit is inherently riskier just because it's private."

Private credit is less liquid, but Securian's Hilger believes some less liquid investments--with higher yield and more protections--make sense. On the other hand, O'Malley said Penn Mutual prefers to hold capital until an opportunity to buy cheaper assets arises.

"Insurers are good holders of liquidity risk," Watters said, but not of bad credit risk. Still, Lorilla from Brookfield Wealth Solutions noted "pockets of opportunity" in speculative-grade risk, which Brookfield holds directly on its balance sheet and through structures.

Uncertainty Around Extreme Weather

While we believe the credit fundamentals of North American P/C insurance are strong, extreme weather is a drag, said S&P Global Ratings Managing Director and P/C Sector Lead Neil Stein.

Our panelists agreed that "climate change matters for insurance," as Dr. Julia Borman, assistant vice president, regulatory and rating agency client services for Verisk Analytics Inc. said. But it's not the whole picture.

As extreme weather events are growing more frequent, more severe, and less predictable, Schnitzer from Travelers, General Reinsurance Corp. Chief Underwriter – Regional & Specialty and Mutual Practice Erin Kang, and Selective CRO Cunniff all noted that more people are moving into areas with high climate risk and building more expensive homes (given high inflation). "So it's not just the climate that's changing, it's also the underlying exposure," said Kang.

The industry is working to improve modeling, but certain states--like California--have limited insurers' ability to apply climate models in their underwriting. As a result, California's insurance system is "in crisis," said Eric Goldberg, American Property Casualty Insurance Assn. (APCIA) department vice president and counsel, commercial lines. The state is an example of how "regulators can cause an availability issue in their market" by limiting insurers' nimbleness, said Frances O'Brien, executive vice president and CRO of Chubb Group.

Given USAA's mission, "we don't leave states," said USAA Capital Corp. President and CEO Juan Andrade. But he agreed that regulations in some states are making it hard to keep insurance available and affordable. "The reality is the storms haven't stopped," he added, so there's more work to do.

Uncertainty Around Regulation

Schnitzer noted the current difficult regulatory environment as one of his top three challenges for the industry. "We need regulators to support risk-based pricing," he said. Dr. Borman also said she spends a lot of time educating regulators on this issue. There were two other main areas where panelists agreed the industry needs to educate and partner with regulators: tort reform and offshore reinsurance.

Tort reform

Allstate Corp. Senior Vice President, Government & Industry Relations Richard Loconte said "you just can't get away" from attorney advertising, and it's "eroding" the trust that policyholders have in their insurers.

In addition to attorney advertising, part of what's driving the increase in claims going to court is litigation financing by hedge funds and "fraudulent operators," said Crum & Forster Holdings Corp. CEO Adee. "Litigation financing is kind of un-American," he added.

These factors have led to more litigation and more expensive verdicts, which are difficult for insurers to price and reserve for. Whether they called it tort reform, social inflation, or "legal system abuse," panelists agreed with American Financial Group's Lindner, who wants to see "more tort reform and effort on litigation financing."

"Since Florida's 2023 tort reform… the frequency of nuclear verdicts has materially declined," said Tim Zawacki, senior lead, equity research/fixed income at S&P Global Market Intelligence. For Andrade, it's no longer accurate to call such large verdicts "nuclear," because they're happening so often. He said reforms like those in Florida are necessary across the country.

To pass those reforms, said Goldberg, from the APCIA, "nothing beats having a good, personal, trust-based relationship with your regulator." He said the industry should try to think about their goals from regulators' point of view: focusing on consumer protection, company solvency, and compliance with the law.

But it's a "constant battle," said Loconte--a win isn't certain to stay, and insurers have to put as much resources into making the reforms stick as they do into getting the reforms passed in the first place.

Offshore reinsurance

On the life side, there's growing interest in offshore reinsurance vehicles--especially in Bermuda.

"The biggest benefit that Bermuda has over all the other offshore jurisdictions is the track record and the experience," said Jeff Burt, Co-CEO of Aquarian Insurance Holdings LLC, which has a Bermuda-based reinsurance arm, Somerset Re.

Talcott Financial Group CEO Imran Siddiqui said for his company, the policyholder is the key stakeholder: "The decision on where to reinsure is mainly driven by clients' preference in jurisdiction and what ultimately serves the policyholders best."

Burt also said there's a misconception that assets are leaving the U.S. to go all over the world, but it doesn't work that way. The ceding company remains on the risk, in case of a recapture, and the assets stay on its balance sheet in most cases, depending on the reinsurance treaty structure.

While mutual company CEOs O'Malley and Hilger both said they're not opposed to offshore reinsurance, they haven't used it yet. O'Malley said his jurisdiction of choice is America. But RGA has its own offshore reinsurance. Cheng said he wants offshore jurisdictions to be well-regulated so the playing field remains relatively level.

Insurance Offers Stability Through Uncertainty

In line with our stable sector views on North American life and P/C insurance and global reinsurance, panelists emphasized the stability that the insurance sector provides in times of uncertainty.

"We are the oxygen of industry," Gallagher said. And when things fall apart, "we… put people's lives back together."

Writer: Devon Reilly