Ernest Csiszar, former president and CEO of the Property Casualty Insurers Association of America, discussed these issues at the Cayman Captive Forum held at the end of last year.
Ernest Csiszar plunged straight into his presentation at the Cayman Captive Forum with a damning blast at the political manoeuvrings within the financial services industry as of the end of last year. He said, “I left my native Romania to live and work in the US where I believed that it was up to business to take on economic risks but now I fear I am living in the Socialist Republic of the US! We now find ourselves in the horrible situation of overt political intervention in the markets, with a direct impact on the insurance industry.”
Csiszar said the States had “scrambled and fumbled through this crisis” and feared that the worst was yet to come for the economy. He said there were “50 different edicts emanating out of the US Treasury and the Federal Reserve, no public supervision and 50 different programmes to solve” within this current crisis, while systemic risk had not been uncovered.
“These edicts only serve to increase instability and uncertainty and only fuel more uncertainty. Until the rules of the game are fully established, what sane investor would invest now?” he wondered.
Csiszar said that there was still an estimated US$55 trillion worth of collateralised debt obligations (CDOs – cited as the trigger for the economic meltdown at the end of last year) that had not been unwound. Putting that number into perspective, Csiszar quoted the US’s GDP as US$13 trillion.
Examining the issue from an insurance perspective, Csiszar pointed out that the life insurance industry was “involved in the credit crunch up to its neck” and said that the ongoing housing crisis, with 500,000 new homes placed on the market last November alone, would continue to grow.
“The three main issues are as follows: the rules of the game are not properly understood; the CDO issue will only get worse as falling house prices exacerbate the issue and in the real world on ‘Main Street’ the recession actually started a lot earlier – at the end of 2007/early 2008,” Csiszar said.
Csiszar anticipated a protracted recession, lasting at least two years and said it could last up 15 years if Japan’s experiences in the 1990s are anything to go by.
“The biggest problem is how to insulate a market-driven economy from political meddling through nationalisation,” he confirmed.
One of the worst examples of such political meddling was, in Csiszar’s mind, when Nixon too the States off the gold standard and “created as much credit as he wanted”.
One particular worry, in Csiszar’s mind was one of the 50 edicts from the Federal Reserve and the US Treasury which highlighted the need for comprehensive supervision of the financial services industry, increasing state regulation.
Credit was another serious issue for the markets as it was the “foundation” of the industry, “without which the insurance industry cannot carry out any real activity.”
Csiszar said, “After the fund industry, the insurance industry was the single biggest investor in the capital markets.”
“It’s time for the risk managers to start to speak the same language as the statisticians because the risk models dreamt up by the statisticians are all wrong,” Csiszar stated. “For example, Morgan Stanley’s sophisticated models worked on the deliberate assumption that house prices could only go one way: up. It has to be wrong to simply accept such platitudes.”
On a positive note, Csiszar said that there were some great opportunities now available on the alternative risk side of business with the logical answer for many big companies to offload their balance sheet and create a captive insurance company: “Wherever there is a crisis there is the opportunity to make money” he said.