Survey: Investigations into Industry Practices to Expand in 2005; Respondents Expect Consolidation to Continue

January 14, 2005

Leaders of the property/casualty insurance industry expect the investigations into certain industry practices by state attorneys general and insurance departments will continue to expand in 2005, according to a survey conducted by the Insurance Information Institute at its ninth annual Property/Casualty Insurance Joint Industry Forum in New York.

According to the survey, 92 percent of executives in the property/casualty industry are convinced investigations will expand, and 67 percent of respondents thought that most companies will be able to settle charges against them this year.

Insurance leaders were split as to whether the industry’s financial performance would continue to improve in the year ahead. Fifty-seven percent of survey respondents expect 2005 to be more profitable than last year, as measured by the combined ratio, a percentage of each premium dollar a property/casualty insurer spends on claims and expenses. The combined ratio for 2004 is estimated at 97, which would mark the first time since 1978 that the industry posts a profit.

Asked if insurers thought the P/C commercial market would soften significantly in 2005, 53 percent thought it would not. Sixty-three percent of insurers thought the personal lines market would not soften.

Broken down by lines of insurance, 55 percent of respondents do not expect auto insurance to be more profitable in 2005.

Fifty-three percent of respondents predict the homeowners line to be more profitable than last year and 96 percent expect interest rates to rise in 2005.

“The historically low interest rate phenomenon is over,” said Robert Hartwig, senior vice president and chief economist of the I.i.I. “Market forces and the Federal Reserve are jointly forcing rates upward. If rate increases occur gradually, then this will ultimately increase insurer earnings on their investment portfolios.”

On the investment side, 80 percent of industry leaders are looking for another up year in the equity markets. “This will bode well for industry investment returns,” Hartwig said.

Sixty-five percent of respondents expect consolidation among insurers and reinsurers. In addition, 57 percent of insurers do not believe the number of rating agencies upgrades will outpace downgrades in 2005.

Businesses in almost every industry are seeking tort reform. Fifty-one percent of respondents expect Congress to pass and President Bush to sign meaningful class action reform legislation in 2005.

Insurers continued to remain pessimistic this year when it came to workers’ compensation. Seventy-seven percent of respondents thought there would be no improvement in the workers’ comp market.

Sixty percent of respondents expect no overall improvement in commercial lines (excluding workers’ comp), yet 65 percent of respondents felt commercial insurers are still disciplined in their underwriting.

“Hard market conditions moderated substantially in 2004,” Hartwig said. “Rates of return in the property/casualty insurance industry, while improving, are still only in the 10 percent range; well below the 13 to 15 percent typical of Fortune 500 companies.”

With regard to the Terrorism Risk Insurance Act of 2002, 53 percent of survey respondents do not believe Congress will act to extend the program in 2005.

To access survey results, go to: www.iii.org/media/met/2005jif/.

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