Emerging from Crisis: Dr. Robert Hartwig, President of the Insurance Information Institute, Is a Widely Recognized Face of the Insurance Industry, Who Has Appeared in Virtually Every Major Print and Television News Outlet. Recently, He Spoke with Risk Management about the Affects the Global Financial Meltdown Will Have on the Industry in 2009

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As we enter 2009, we're seeing an economy in free fall, a soft insurance market and the shock waves of a staggered AIG. What should the corporate insurance buyer expect to see in the coming months?

If I knew that, I'd be a billionaire. It seems that as we enter the last part of 2008, commercial insurance prices are firming. They are not rocketing upwards, but the magnitude of price decreases is shrinking. Prices have been falling for the last four to five years--except in coastal areas--on a continuous basis. Now they are flattening; instead of insurers renewing negative accounts they are renewing flat or slightly positive ones. That is notable from a risk management perspective.

Insurers now have to be more dependent on a financial return from their underwriting side because of the dramatic losses in investment returns. Insurers are facing the same losses as before, so they need the same revenue. But with less on the investment side, they need to get it through rates.

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There is bound to be a rash of legislation and regulation coming out of Washington in response to the market turmoil and government bailouts of late 2008. How much of it is likely to impact the insurance world?

There is a certainty of additional regulation and legislation for the financial service industry and that includes insurers as well. We are in the final months of a 135-year-old, purely state-based regime of insurance regulation. The only question that remains is how the power will be shared between Washington and the states. It is unlikely that Washington will have 100% regulatory authority over the insurance industry, so how will power be shared and to what degree can the reds pre-empt state insurance law?

Ultimately, there will be more regulation on the entire financial services sector. What form it will take is unclear, but the emphasis will be on the prevention of systemic risk. There may be issues related to liquidity, capital regulations, transparency, disclosure and a variety of other things. But we have to see how that works out.

As the financial services industry recovers, its innovation seems likely to be constrained by both regulation and a more conservative approach in general. Is there any chance this sense of conservatism might also impede innovation within the insurance industry? And if so, how might this affect the insurance buyer?

Clearly, the entire financial services industry is going to be chastened by this event. Financial services companies are going to be more conservative, post-crisis. There is no doubt about that. But the degree to which their operating models will change is more significant for investment banks and commercial banks than for insurers and reinsurers.

What will happen to life insurers is unclear because there are some that have issues right now. …