(Hartford Business Journal) – Despite a 90 percent decline in profits through the first three quarters of 2008, property and casualty insurers have outperformed several other financial sectors, according to Bob Hartwig, president of the Insurance Information Institute.

Hartwig, who delivered a state of the insurance industry address at the state Capitol last week, said property and casualty insurers have coped with the crisis better than banks thanks to more successful risk management policies and lower leverage.

Through September of last year, banks lost nearly $600 billion, while P&C insurers shed $106 billion, Hartwig said.

“Insurers’ overall approach to risk focuses on underwriting discipline,” Hartwig said. “That implies pricing accuracy and management of potential loss exposure.”

State lawmakers invited Hartwig to speak before the Insurance and Real Estate Committee to get an overview of the challenges facing the industry, which has a major presence in the state.

With 117 insurance companies domiciled in Connecticut and dozens of out-of-state insurers with key divisions here, the industry contributes $15 billion to the state’s economy and employs nearly 74,000 people, Hartwig said. Connecticut insurers have payroll expenditures that exceed $8.5 billion annually.

“You are right to show concerns for the industry because it is such a major player in Connecticut,” Hartwig told lawmakers.

Hartwig said property and casualty insurers have weathered the storm because they do not rely on borrowed money to underwrite insurance or pay claims, and they have little or no debt on their balance sheets.

Insurers also have had a relatively conservative investment philosophy and a strong relationship between underwriting and risk bearing, Hartwig said.

“Insurers always maintain a stake in the business they underwrite, keeping skin in the game at all times,” Hartwig explained. As a result, he added, insurance markets, unlike banking, are operating normally and the basic function of insurance continues uninterrupted.

“That means insurers continue to pay claims, renew policies, write new policies, and develop new products,” Hartwig said.

Despite the relatively positive outlook for property and casualty insurers, however, Connecticut life and health insurance companies have had their problems.

Life insurers, including the life unit of Hartford Financial Services Group Inc. and The Phoenix Cos., have suffered losses related to their investments and variable annuity products, while the state’s health insurers, including Aetna and Cigna, have been dogged by investment losses and a slumping economy that is causing employers and consumers to reduce health coverage.

All four companies have announced major job cuts in recent months.
Who Will Regulate?
During the same public hearing, state Rep. Brian J. O’Connor (D-Clinton) asked if state regulators have enough authority to adequately oversee the insurance industry through the current economic crisis.

State Insurance Commissioner Thomas Sullivan, without hesitation, responded with an adamant, “Yes. I believe that we have everything we need to continue to supervise the health of the marketplace.”

O’Connor posed the question because of his concerns over the near collapse of American International Group. AIG, the country’s largest insurer, has required a $150 billion government bailout after sinking under the weight of billions of dollars in sour credit default swaps.

Critics of state-based regulation, which has been in place for decades, have argued that AIG’s freefall shows the need for federal oversight.

Last March, the U.S. Treasury Department proposed sweeping changes that would allow insurers to choose between state and federal charters and regulation.

The insurance industry largely applauded the plan, known as optional federal charters, but it created great angst among state regulators, including Sullivan.

Sullivan said state regulation has performed quite well in the current economic crisis, noting that no insurance company has gone insolvent, while 25 banks, some of which were federally regulated, have failed.

Sullivan explained that AIG’s freefall was not a failure of state-based regulation because AIG Financial Products, the business segment that brought the company to its knees, was actually federally regulated.

AIG Financial Products, which has offices in Wilton, was responsible for trading credit default swaps, the unregulated insurance contracts that bet against the repayment of a debt. They have been an important contributing factor to the financial crisis.

Sullivan said “optional” federal charters imply a form of deregulation. “I don’t think there is a person in Washington that thinks optional federal charters has legs right now,” he said.