Maintaining underwriting discipline and keeping expenses in line with slowing premium growth will pose major challenges to property/casualty insurers in 2008, according to industry analysts.
A panel of experts on industry financial performance outlined whether the current slowing of premium growth combined with excess capital will result in difficulties for the industry similar to those created by the soft market of the late 1990s that led to combined ratios rising from 102 in 1997 to 116 in 2001.
Steven Weisbart, vice president and chief economist for the I.I.I., said that while insurer profits peaked in 2006, things could be even better this year, “if there are no large catastrophes and investment results don’t plummet.”
Weisbart, told attendees at a recent Casualty Actuarial Society (CAS) meeting, that while the industry’s net income after taxes rose steadily between 1991 and 1997, the industry’s return on equity (ROE) since 1987 has been below the average ROE for all other U.S. industries listed in the Fortune 500. “This is not a wildly profitable industry,” he said.
In the area of underwriting, Weisbart focused on the combined ratio for the industry. In almost every year since 1970, the I.I.I.’s chief economist pointed out, there was an underwriting loss, with the exception of two very good years of 2006 and what will turn out to be the results for 2007.
Weisbart said property/casualty insurers are experiencing their slowest growth in net written premiums since the late 1990s. “It’s about as soft a market as you can imagine,” he noted, “and the current projection of relatively slow premium growth is expected to continue until 2010.”
The period of 2006 – 2010, post Hurricane Katrina, could resemble the slow premium growth period of 1993-1997, or the post Hurricane Andrew era, he said.
One of the reasons there may be less growth in net written premiums for traditional insurance companies is that some of those premiums are going to risk retention and self-insurance groups that represent a form of competition to traditional insurers and captives.
Insurance pricing will be under intense pressure next year, Weisbart said, with average auto insurance expenditures nationwide expected to fall 0.5 percent this year, the first decrease in that line since 1999. He said lower underlying frequency and modest severity are keeping auto insurance costs in check.
Average home insurance expenditures nationwide increased an estimated 6 percent in 2006 with homeowners in non-catastrophe zones experiencing smaller increases while those in catastrophe-prone areas, such as Florida and the Gulf Coast, incurred larger rate hikes. But rates for commercial insurance have gone down for the last couple of years, Weisbart said
Expense ratios for insurers will likely increase, as premium growth slows, putting pressure on companies to control their expenses. On the commercial side, expenses have been brought down, while in personal lines there really hasn’t been much progress made to reduce them, Weisbart said.
Weisbart also warned that prevailing interest rates and current volatility in the stock market are not offering insurers much hope for significant investment gains.
However, Weisbart said that as of the end of June, the property/casualty industry’s policyholder surplus had grown to $512.8 billion – 5.3 percent above year-end 2006 and 54 percent above its 1999 peak. He said industry surplus that measures underwriting capacity exceeded a half trillion dollars for the first time during the second quarter of this year. In addition, the premium-to-surplus ratio is approaching the all-time record set in 1998.
Stephan Christiansen, senior vice president and director of research for Conning Research & Consulting, told the actuaries that while a lot of financial challenges remain for insurers, there are also a lot of opportunities.
Christiansen said his company forecasts not only the industry as a whole but also examines industry segments to try to understand what drives change. He said the good news is that companies are still amassing capital and that capital strength in the industry is growing. He noted that a lot of insurers are performing very well, even through economic downturns.
Christiansen pointed out that successful companies are those that are making better use of information and technology. He said underwriting results from those companies illustrate a widening performance advantage brought about through the improved use of such technology.
He warned, however, that regulation of the industry is getting tougher and volatility is increasing. An example of regulatory volatility is seen in the current public debate over whether to repeal the McCarran-Ferguson Act that granted insurers limited anti-trust immunity and whether to establish an optional federal charter to create a federal regulatory system. This could quickly change the competitive landscape, he noted.
“Politics can change the business environment of the industry with the stroke of a pen,” he said.
Increasing volatility can also be seen in changing loss distributions influenced in part by the emergence of new exposures, larger and more frequent catastrophes, higher risk attachments, and medical inflation.
Christiansen said the soft market cycle for insurers in past years may be repeated, but that for now, things look fairly benign for the industry for the next couple of years. “More capital will be needed in the future for companies to continue to compete and expand coverage offerings,” he concluded.
Richard Spiro, a managing director and head of the Financial Institutions Group in North America for Citi, gave actuaries a Wall Street view of what investors think of the property/casualty industry’s financial results and what may be coming in the future for insurance company mergers and acquisitions (M&A).
Like Christiansen, Spiro warned that volatility continues to be a major industry challenge in the form of increased regulatory scrutiny around reserve adequacy, tort reform issues, the threat of terrorist attacks, and natural catastrophes. “These areas impact how companies operate and how the market views the sector,” he said.
Concerns over volatility have resulted in less dramatic consolidation in the property/casualty industry, but M&A activity follows market cycles, he said. He sees several of the drivers of potential consolidation to be the build-up of excess capital, the desire for product/geographic diversification, and an increased level of foreign investments. Spiro said M&A activity would increase as insurers continue to look for growth opportunities.
The session was moderated by Elissa M. Sirovatka, consulting actuary, Towers Perrin.
Source: Casualty Actuarial Society
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