Insurance think tank forecasts more mergers, political gridlock

Whoever wins the White House in November, relations between the major political parties in Washington may be as combative as ever, as neither Democrats nor Republicans are likely to secure control of both houses of Congress. That will make it difficult to enact long-stalled legislation on major national issues.

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The source of this dismal forecast: top executives of the Insurance Information Institute (III). They co-presented a special address on the impact of the November elections on insurers during the closing day of the “7^th Annual Insurance M&A Symposium,” held Thursday at the Union League Club in New York City.

The two execs — III President and CEO Sean Kevelighan, and James Lynch, vice president of data information services and chief actuary — explored a host of political and economic issues that will buffet the industry in 2017, including federal and state elections, ballot initiatives, catastrophic losses, the growing opioid epidemic, pending mergers and not, least, a tightening of the regulatory vice by U.S. and global authorities.

Of particular concern to insurers is “conduct regulation,” an emerging concept that calls on insurers to improve their behavior by aligning corporate and product governance, incentives, market conduct and ethical codes, among other measures, with the their mission and values.

“Conduct of business regulation is causing growing alarm among insurance companies,” said Kevelighan. “It’s still not a well-defined concept that the U.S. Financial Stability Oversight Council and regulators in the G20 countries are embracing.”

Global hot spots

Turning to politics, Kevelighan flagged a number of issues the next American president will have to tackle come 2017. Among them: China as a growing military power, regional tensions in the developing countries, and the rise of the far right in the U.S. and Europe.

In respect to the last, he doesn’t foresee extremists in the Democratic or Republican parties taking power. What can be expected is more legislative gridlock, as the two parties battle over such contentious issues as immigration, tax reform and free trade. Relations on Capitol Hill could be especially contentious, he noted, if Clinton wins the White House and the GOP retains control of one or both houses of Congress.

In this political environment, social media could become a more prominent “bully pulpit” of lawmakers and political operatives seeking to elicit public support for policy positions. The “alternative Twitterverse” has gained notoriety during the presidential campaign, he noted, thanks in no small part to Trump’s extensive use of the social network, his frequent missives landing “body blows” against political opponents.

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The outcome of the November elections will likely have limited bearing on the industry’s “return on equity” or profitability, said III vice president James Lynch. (Photo: Thinkstock)

If past experience is any guide, said Lynch, the outcome of the November elections will have limited bearing on the industry’s “return on equity” or profitability. Reviewing the historical record since 1950, he noted that ROE has for property and casualty carriers varied little on average during Democratic or Republican administrations: 7.72 percent versus 7.85 percent, respectively.

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Industry return on equity hit its peak under the Carter administration, attaining 16.43 percent; the second highest ROE was under the Reagan administration (15.10 percent). ROE since President Truman assumed the White House in 1945 has ranged between 3.55 and 8.93 percent.

A more important driver of industry revenue and profitability, said Lynch, is politics out in the hinterland, as insurance regulation is primarily a state function. On this level, the picture is decidedly mixed: Only about a half-dozen states, according to a December 2015 R Street Insurance Regulation Report Card, received a grade of A- or higher in terms of industry-friendly regulation. Those receiving a “B” predominate in the Midwest, West and Southwest.

Among those receiving “D” marks: California, Montana, Texas, Louisiana, Mississippi, Florida and (not surprisingly, given its leadership role in state regulation) New York. One state in the report card received an “F” — North Carolina.

Of the 50 states, said Lynch, Republicans currently control both chambers of 30 state legislatures and the Democrats 11. “Split legislatures” (each party controlling one chamber) prevail elsewhere. This balance of power is likely to remain after the November elections, regardless of a Clinton or Trump victory.

“Republicans control most states, and it’s likely to remain that way,” said Lynch. “But 20 chambers could switch, mainly in states with split legislatures.” These include Arizona, Colorado, Iowa, Kentucky, Maine, Minnesota and Washington.