Profitable or Not’ U.S. P/C Industry Struggles to Get Ahead

While U.S. property and casualty insurance carriers have worked hard in the past couple of years to follow the “return to underwriting” command, looking critically at the risks they’re insuring and raising rates accordingly, the goal of profitability is getting increasingly harder to achieve according to one industry leader. In addition, a study of top industry professionals found that the goal won’t be met through price increases alone.

In a speech at the annual meeting of the Society of Insurance Research in Florida, Frank Coyne, chairman, president and CEO of Insurance Services Office Inc. (ISO) cautioned that the profitability of the nation’s P/C industry is still going downhill despite significant growth in premium over the past few years. Coyne warned a return to competitive excesses following a brief partial recovery could plunge the business back into another prolonged drought in profitability.

Meanwhile, according to a study conducted by the Economist Intelligence Unit for Deloitte in August and September of this year, only 11 percent of the senior insurance executives surveyed say premiums are the most effective way to boost bottom-line profitability. In contrast, 86 percent of the executives felt that improving core insurance operations was the best way to increase profits.

ISO’s Coyne pointed out that achieving strong returns more difficult than it used to be. “In the first three years of this decade, the industry’s rate of return has averaged just 2.8 percent,” he said. Noting that the industry’s first-half 2003 combined ratio was 99.8 percent, Coyne said “the industry’s annualized rate of return was 9.7 percent—well short of the 15 percent rate of return equity investors look for.”

Coyne conceded that 1987 was the last time the industry posted a first-half annualized rate of return of 15 percent, when the combined ratio was 104.1. “To achieve a 15-percent rate of return with today’s leverage, investment results and tax rates, the industry would have to post a combined ratio in the neighborhood of 94.4,” he said.

According to Coyne, ISO MarketWatch™ research shows rate increases for commercial policies peaked at 12.9 percent in July 2002 and have been going down since then, dropping to 7.7 percent this past June.

For 2003, ISO projects a combined ratio of 102.9—a 13 point improvement over 2001 and nearly 4.5 points better than 2002. ISO further projects the industry’s combined ratio will improve another two points to 101 in 2004.

The Deloitte group surveyed 80 executives—representing each major geographic region and all industry sectors. One-third of survey respondents were based in Europe, 28 percent from the United States and 22 percent from the Asia-Pacific region. In the study, 76 percent of life industry respondents and 68 percent of property/casualty respondents felt better cost control is an effective way of improving bottom-line profitability. The respondents also identified four core areas through which they felt performance could be improved: underwriting, claims management, exposure/risk
management and business controls.

Highlights from the survey regarding these four core areas include:
• Better information on risks is the most important factor in improving underwriting, according to 67 percent of respondents.
• Only 15 percent described their claims management process as excellent. Fewer than half believe their processes are good; the rest said they are fair.
• Less than one-quarter of survey respondents (23 percent) said their company’s internal control environment is “always reliable,” with 24 percent conceding that internal controls are often unreliable.
• All survey participants from the annuity segment said distribution affects the profitability of their business, while 93 percent of life insurance respondents and 86 percent of those from the property/casualty segment agreed with that assessment.

According to Owen Ryan, global managing partner of Deloitte’s insurance practice, only 4 percent of the respondents viewed conditions in their sector as “excellent.” Ryan said “this result more than anything else underlines the urgent need for companies to get their focus back where it belongs—back to the business of insurance.”

Topics USA Profit Loss Market Property Casualty