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The property and casualty insurance industry is projected to be smaller, in dollar terms, once the current financial crisis is corrected, according to a leading industry economist. Once the recession finally ends, the industry will be about 3 percent smaller, perhaps even 7 percent smaller accounting for inflation, says Bob Hartwig, president of the Insurance Information Institute.
There will not be a sudden end to the current financial downturn, Hartwig told an audience of independent insurance agents at the recent conference and trade show of the Independent Insurance Agents of Texas.
“We will not wake up one morning and say thank goodness this crisis is over. It will be slow. It will be uneven. It will be two steps forward and one step back. That’s how recoveries are. And it will be a different experience in every state,” Hartwig said.
The monetary reduction in the P/C insurance industry won’t result solely from the weak economy. “It’s also because this economic downturn happened to be coincident with the soft market,” Hartwig said. “Especially in commercial lines – that’s what’s holding down growth in the industry.”
He said falling prices, weak exposure growth, increased government intervention in private reinsurance and insurance markets, large retentions and alternative forms of risk transfer have all combined to siphon premium from the private P/C insurance market.
While noting there’s potential for a “mini-consolidation wave” among insurers as a result of the soft economy/soft insurance market, Hartwig expects the industry to “emerge with its risk management model more intact than most of the financial services sector. The P&C insurers have truly distinguished themselves in a positive way from the banks and the investment banks – and to a significant extent many life insurers.”
Hartwig said investment earnings will continue to suffer for “an extended period of time.” As a result, “insurers are going to have to return to their basics, return to their roots as underwriters. This period of low investments is putting the greatest pressure to generate underwriting profits that we’ve seen in more than 40 years,” he said. “The only way, really, to earn a risk appropriate rate of return given the current investment environment is to generate an underwriting profit.”
He predicted the industry, which was profitable before the crisis and has remained so throughout, will continue that profitability. However, profits may be harder to come by.
Still, the P/C insurance industry has the ability to sustain itself for some time through a period of “profitable stagnation,” Hartwig said. “In other words, where there is very low growth, but where it remains profitable. That can be done through very, very disciplined underwriting.”