Pricing discipline key to P/C insurers’ repeat performance in 2007

>Insurers delivered strong results for 2006; now the question becomes can they remain disciplined?

Property casualty insurance industry earnings may have peaked in 2006 but that doesn’t mean 2007 will see a reversion to reckless price cutting and relaxed underwriting, according to experts observing the industry.

Instead, insurers should be able to build on the momentum of 2006 to deliver another profitable year in 2007, maintained panelists at the annual Property/Casualty Joint Industry Forum in New York City recently.

In a session entitled View from the Outside Looking In, they all agreed that 2007 and even 2008 are looking good for property casualty insurers as long as they continue to price risks properly.

Dr. Robert Hartwig, president and chief economist of the Insurance Information Institute, noted that 2006 was a record year for the P/C industry, with net income after-taxes at nearly $60 billion, according to latest estimates. The industry also delivered its best return on equity in about 20 years–in the range of 14 percent.

“What is driving that is the industry’s very strong underwriting performance,” said Hartwig. “We are looking at potentially the best combined ratio in 60 years, maybe in the low 90s.”

This was due partly to the huge drop in insured catastrophe losses, which went from $62 billion in 2005 to just $8 billion in 2006.

Looking ahead, Jay Gelb, senior vice president and senior non-life insurance equity analyst, Lehman Brothers, said he expected industry earnings to remain at robust levels in 2007 and 2008, though perhaps lower than 2006 levels. He estimated returns of 10 percent to 13 percent through 2007.

“Overall the industry’s returns probably peak in 2006 and part of that is because we had very low catastrophe losses last year,” noted Gelb. However, he added that the strength of the industry’s balance sheet would allow it to sustain these results going forward.

At the same time, Gelb noted, given the good combined ratios being achieved in both personal and commercial lines, competition is likely to heat up.

Personal lines favored
Except for catastrophe losses, the homeowners insurance line has been performing well for years, noted personal lines expert Brian Sullivan, editor, Risk Information, Inc., who added that auto insurance is also looking good.

He maintained that the good results could be attributed to insurers’ impressive commitment to adequate pricing. “We have seen more pricing discipline, particularly in personal lines, in the last five years than I have seen in my career. I think it is because no one knows what to do,” said Sullivan.

The lack of price-cutting makes for a rather unusual market for those who have been through previous cycles. “Everyone wants to grow profitably but the question is how. I don’t think anybody has been in a situation where we are not cutting prices to grow market share,” Sullivan added. “This would change only if someone was to do something stupid, or there is an unexpected claims shock.”

Matthew Mosher, group vice president of Global P/C Ratings, A.M. Best Co, observed that there has been some market softening, particularly in auto, but he also believed the industry was maintaining its pricing discipline.

“In 2006 the industry saw a level of profitability it had not seen in quite a long time, but we are still not seeing the level of rate cutting that would suggest undisciplined pricing,” said Mosher.

“There is also a much greater focus on risk in the industry than ever before, which will help minimize the impact of any rate softening,” he noted.

Mosher described the market as experiencing some “price settling but not discount pricing” as might have been the case in years past.

Mosher agreed with Sullivan that to the extent personal lines prices are going down they are doing so based on real risk factors influenced by demographics and safety advances. “There is more focus on risk than ever before,” he maintained.

Hartwig noted that the P/C industry is expecting net written premium growth of just 2 percent in 2007.

In that environment of slow organic growth, it is possible that insurer merger and acquisition activity could pick up, according to Gelb.

Hartwig suggested another possible trend might be East Coast regional insurers moving into the Midwest. But Sullivan questioned whether this is really happening. “You don’t see the price cutting which would indicate more competition there,” he commented. “There’s a lot of talk about it but I’m not sure it’s happening.”

Commercial trends
As for commercial lines, Gelb said risk managers can expect a continuing stable market, with pricing relatively flat and terms and conditions restrictive. The exception would be for any wind-exposed property.

In the liability arena, Hartwig described the tort system as “remarkably better” thanks largely to the efforts of some states. Gelb said he thinks the liability picture will continue to improve while Mosher said he is concerned that Democrats’ control of Congress might slow progress in this area.

Mississippi view
George Dale, Mississippi insurance commissioner, cautioned that despite the industry’s collective record results in 2006, each line of business has to stand on its own by state. “We in Mississippi don’t want to be paying for forest fires that happen in southern California and neither do they want to be paying for hurricanes that hit Bay St Louis, Mississippi.”

Panelists discussed the ongoing wind/water litigation issues relating to Hurricane Katrina, agreeing that a resolution on these issues would be beneficial to the industry in the long-term.

Dale noted that while negotiations are underway with some parties relating to a large number of impending lawsuits, as yet no agreement had been reached. “My concern is to be sure that the rights and settlements of the insureds are protected and that they don’t just get a coupon and the lawyers run off with all the money.”