The U.S. economy is evolving in many ways, most significantly when it comes to both the cost of capital and the ownership of capital, and that change in capital ownership is a challenge for the insurance industry, according to William R. Berkley, chairman and CEO of the W.R. Berkley Corp.

“Capital ownership is changing in every way. So when we talk about shared cars, part-time housing or bikes, all that is shared use of capital,” Berkley said during a presentation at the Joe Vincent Management Seminar, held in late January by the Independent Insurance Agents of Texas.

Shared capital also exists in the insurance business as well, he said, citing a company called CATCo Investment Management.

“It’s not an insurance company, but it provides catastrophe protection on a defined and secured basis to insurance companies, so they don’t need as much capital,” Berkley said. There are other companies, too, “that lend their capital to fill niches in the business, that offer opportunities to reduce the capital required of insurance companies. So in essence they are creating a new type of insurance enterprise that has layered capital.”

The insurance company holds the base layer of capital and then other layers of capital are available for a fee for specific kinds of demands and uses, he said.

It works because there are trillions of dollars in capital built up in investment vehicles, such as pension funds and investors are expecting a decent return on their money.

“So if you have a $500 billion pension fund why not lend up to $25 billion to an insurance company,” Berkley asked.

“You get paid a fee to have the money on call if the unforeseen event takes place. It’s important because the pension fund expected to pay the pensioners based on an investment return of 7 percent and they’re only earning 3 [percent],” Berkley said.

In order to close the gap and meet the expectations of their investors, these funds “go to an insurance company that never in its 50-year history or 100-year history has needed that extra capital. … And they say we’ll lend you up to X-dollars in capital if you’ll pay us a fee.”

It’s a huge change because “it means that all insurance companies aren’t the same anymore,” Berkley said.

It also changes the core capital of an insurance company to the extent that if it wants to, it can reexamine its “pricing structure or not raise prices as much as it might have to” just as a result of lower investment income.

A Critical Role

Despite the fundamental transformation occurring in the capitalization of insurance companies, Berkley said one thing that is not changing is the importance of agents and brokers in helping customers both understand and secure the coverage they need.

“Brokers and agents fill a critical role in this economy no matter how it changes,” he said.

The only reason people buy insurance is to protect their assets, and it’s up to the agent and broker to ensure that customers buy the coverage they need and to see to it that their claims are paid appropriately, Berkley said.

Agents fill the knowledge gap for customers and “at least for the foreseeable future it will be hard for a computer to do that,” he added.

“It may not be as true for automobile insurance as we might like but for most other lines of insurance the value you bring is critical,” he said.

‘Nobody Did Anything’

One of the reasons the economy has improved over the last few years is “because nobody in Washington did anything,” he said. “Nobody did anything and we were the dummies because we complained they didn’t do anything. We probably were better off.”

For the first time in many years the U.S. economy looks better than anyplace else in the world, he said. Low interest rates may not favor insurance companies but industrial and commercial companies derive real economic benefits from them. Unemployment is down and consumers are benefitting from lower oil and gas prices.

There are things, however, that are not so good for the economy. Over-regulation is one of them, in Berkley’s view, making the ability to build businesses still tough.

Still, “our technology, our entrepreneurial behavior are driving our growth,” he said. And, he added, “You’re going to see the Asians and Europeans trying to attack our technology, because it’s a huge American competitive advantage.”