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Enoch Yiu

Pressures should force up cost of cover and end price wars, says  GE executive

Customers may pay more for insurance cover as falling investment income and natural disasters take their toll on the industry worldwide, according to the chief of the insurance arm of General Electric.

The risk of terrorism was also likely to have an impact on costs,  GE Insurance Solutions chairman, president and chief executive Ron Pressman said yesterday.

With these pressures on the industry, he wants insurance companies to adopt realistic pricing for cover and bring an end to price wars.

'In the US and Japan, the two biggest markets  for natural catastrophe cover, last year we  saw the worst year ever,  with 11 typhoons in Japan and four hurricanes in the US,' Mr Pressman said yesterday.

'Global warming means we are going to see more natural catastrophes in the future.'

Hurricane Dennis, which is now hitting Florida,  has prompted 1.2 million people to flee for safety.

'It is a good wake-up call for insurance companies worldwide to price their products in a fair and reasonable manner and not to charge a price too low for  such risks. We hope to see insurance companies running their business with discipline.'

Price wars have been a concern for  insurance regulators around the world.

Insurance Commissioner Richard Yuen Ming-fai warned earlier this year  that local insurers should be cautious about their pricing after some insurers cut prices  by 40 per cent within three months to compete for business.

Mr Pressman  shares these concerns,  which he will to air to industry peers in Hong Kong during a two-day conference of the International Insurance Society  from today.

Falling investment income had sharpened the challenges for insurance firms, he said. Insurers should increase premiums to make up for a shortfall on investment income.

'We have faced a lot of changes in the past 15 years in our investment market. Fifteen years ago, it was easy for an insurance company to earn 8 or 9 per cent of investment return. Today, we are earning roughly half of that,' he said.

He pointed that in the US,  property and casualty insurance had an average 17 per cent return on equity in 1987, but this declined to 11 per cent last year.

'The insurance industry should make sure our pricing is accurately reflecting the loss environment and the increased risk levels. We have to ensure policies are fairly priced. Customers may no longer enjoy cheap pricing but a reasonable pricing strategy is positive for the financial health of the industry,' he said.

He said the Hong Kong conference  would also allow regulators and insurers to discuss how to restore the reputation of the insurance industry after investigation in the United States into the selling practices of American International Group and other insurers.

Mr Pressman said GE had representative offices in Shanghai and Beijing and it was in the final stage of applying for reinsurance licences on the mainland.

Reinsurance companies share risks for the direct insurance companies and help them  on claims and underwriting audits.

'In China and elsewhere, GE is a selective player.  We aim  to enter partnerships only with direct insurance companies that share the same belief with us, to provide international standards of services and underwriting principles,' he said.

He said China was seriously under-insured, as evidenced in the lack of cover for most victims of the recent flooding.  This would change soon with a rising middle class, he said.

'China is going to have 500 million in the middle class in 25 years,  making it the fastest-growing insurance market worldwide,' Mr Pressman said.

'GE will be able to provide capital and experience on how to handle natural catastrophe cover, which is much needed in China. We are also willing to share our experience.'



Dose of reality awaits insurers