‘Nominal returns’ – Analyst Blogger features on latest Voice of Insurance episode

Ian Gutterman, Portfolio Manager and Investment Analyst, and author of the ‘Ian’sB&R’ blog providing expert analysis on the financial performance of insurance companies.

The latest guest of the Voice of Insurance podcast is a departure from the usual fare. Rather than a CEO or chief underwriting officer telling us about their grand plans, spread of business, or senior leadership career, the most recent episode is an analyst’s tale.

Ian Gutterman might not be as well-known as some guests, but his influence and knowledge are top rate.

Gutterman is the insurance stocks and shares analyst behind one of the most compelling and knowledgeable blogs – known as ‘Nominal Returns’ or ‘Ian’s B&R’ – which takes a cold eye to the performance of insurance industry giants from an investor’s perspective.

Gutterman able to do this because he’s been in-house as an equity analyst for decades and has an in-depth knowledge of insurance performance and strategy, from CEOs, through the assets and underwriting sides, towards owners and shareholders.

Some of his recent blog entries have focused on the recent Los Angeles wildfires. The fires have exposed the deep fractures in California’s insurance market, raising concerns about long-term insurability in the state. According to Gutterman, the crisis is not simply a matter of increasing wildfire severity but is largely driven by a regulatory environment that has hindered insurers from adapting to the realities of modern catastrophe risk.

“California has some very extreme regulations around pricing,” he says. “For 30 years it’s been very difficult to raise prices if you’re in California without regulatory approval, which is almost impossible to get.”

The problem, as Gutterman points out, is that loss trends have far outpaced the pricing caps imposed by regulators.

“When loss trends were benign, insurers could live with that. But with the recent spikes in catastrophic losses, the system doesn’t work anymore.”

This regulatory stranglehold has left insurers in a precarious position. With companies unable to raise rates sufficiently to match the growing exposure, many are pulling back from the market entirely.

“A lot of people got comfortable with the idea that California homeowners’ loss ratios were stable for a long time,” Gutterman says. “But what they didn’t realise was that, relative to the risk they were taking on, pricing was falling further and further behind. And now, they’re in a position where they simply can’t catch up.”

The consequences have been severe. Major insurers have reduced their appetite for writing new policies in high-risk areas, while others have exited the market altogether.

Meanwhile, the state’s insurer of last resort, the California FAIR Plan, is under increasing strain.

“We’ve got a big problem because we’ve got the FAIR Plan assessment, and there’s going to be more again,” Gutterman warns. “This is an unforced error by regulators. Insurers aren’t leaving California because they don’t want to write business here; they’re leaving because they literally can’t make it work under the current system.”

In other catastrophe-prone states, such as Texas, insurers are allowed to adjust pricing in response to changing risks.

In contrast, California’s rigid framework has led to availability crises.

“Look at Texas over the last 10 years; their cat losses have been just as bad, maybe even worse when you factor in hailstorms and freezes, but they don’t have the same availability crisis because insurers can charge what they need to remain viable,” Gutterman says.

The fundamental issue, according to Gutterman, is that California’s pricing restrictions have created a false sense of affordability.

“People in California think they’re getting a raw deal, but the reality is they’re actually getting insurance at below-market rates,” he says. “If you let the market function properly, it would solve these problems over time. But if you keep suppressing rates, insurers will simply leave, and then the only option left is the government stepping in to take on more and more risk.”

Check out Ian’s blog here. https://iansbnr.com/