Aon Worldwide Chairman and CEO Dennis Mahoney flew into Sydney last week for a brief visit, and filled the airwaves and print media with dire warnings that the global insurance industry is being transformed by lousy returns and a capital crisis.

He certainly made it very clear that no one should expect premiums to begin dropping anytime soon. “It will take an awful long time to repair the damage that has been done,” he told Sunrise Exchange News. “The industry has lost about $250 billion since September 11 2001 and only about $30 billion dollars has come in.”

“I don’t think that a couple of years of increased premiums have even begun to fill that capital hole.”   

Mr Mahoney says it is particularly hard for insurance companies to cover liability classes of insurance or any risk that has a potentially long tail attached to it.

“I think we’re living in an environment in which the volatility of the assets side of the balance sheet for insurance and reinsurance companies is at least as bad as the liability side of the balance sheet,” he said. “If interest rates continue to remain historically low and if we have another Kobe or Northbridge earthquake or massive hurricane, the industry will have some severe problems to face.”

He urged Australian insurance professionals to put the HIH collapse in context by comparing it with the losses experienced by all the major insurers over the past few years. “Don’t think about HIH as being a particularly Australian phenomenon because we’ve seen it happen just about everywhere else.

The industry’s weak state should put to an end the theory that any risk can be covered by insurance, he said. “The insurance industry should not be considered as a ‘safety net’ for society unless people are willing to pay even higher premiums,” he said. “And sometimes the cover will be unaffordable.”

Mr Mahoney says insurance premiums are going to have to keep rising if society continues to demand that the industry pay for a long list of hefty claims like asbestos and even September 11.

“We might agree that having an insurance safety net is very desirable, but we must also accept the costs associated with that. If there are going to be more lawsuits and more large judgments, then if that’s going to be the responsibility of the insurance companies to pick up the cost, premiums will have to reflect that increased cost to society.”

Similarly, premiums will have to increase to meet the higher prudential margins demanded by regulators, he said. “More capital to cover risks means premiums will have to increase.”