Competition and Investigations Are Squeezing U.S. Commercial Lines’ Earnings, Report Says

December 7, 2004

U.S. insurers will see their 2004 earnings from commercial lines fall as rate increases peak and legal investigations intensify, according to a report published by Standard & Poor’s.

The report, titled “U.S. Commercial Lines Year-End 2004 Outlook: Rate Cuts and Intensifying Investigations Squeeze Earnings,” explains that the pricing cycle turned around when insurance companies were already counting the losses from an unusually large number of hurricanes and they were targeted by New York Attorney General Eliot Spitzer during the third quarter of the year. The report also cites other sources of downward pressure on earnings from workers’ compensation and other commercial lines, such as the failure of the U.S. Senate to renew the Terrorism Risk Insurance Act, which is due to lapse in mid-2004, or pass the Fairness in Asbestos Injury Act, which the Senate failed to pass this year.

The report identifies the cost of the legal investigations as multifold. Companies that once relied on the unsavory–although not illegal–practice of paying contingent commissions to insurance brokers now face the challenge of developing new distribution models. The reason is that the three leading brokers–Marsh & McLennan Cos., Willis Group Holdings Ltd., and Aon Corp.–have agreed to stop accepting contingent commissions in response to Spitzer’s probe. Even companies not charged with wrongdoing still face the high cost of compliance with subpoena-driven investigations by other state and federal authorities.

“The Spitzer investigation is to insurance what Sarbanes-Oxley is to corporate America,” said Steven J. Dreyer, managing director of the insurance ratings group of Standard & Poor’s.

In addition, insurance companies whose employees are accused of illegal activity–six employees of three companies have pled guilty to charges of bid rigging thus far–face the obvious cost of fines and settlement costs as they strive to get these issues behind them.

The initial impact on 2004 earnings won’t be seen until U.S. insurance companies release their fourth-quarter results. But Standard & Poor’s estimates that net written premium growth for the property/casualty industry, including personal lines, will slow to 6.3 percent for 2004 and 6.0 percent for 2005.

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