New Best Research Report: P/C Profitability Depends on Discipline

In a newly issued research report – “P/C Industry’s Profits Plunge; Insurers Poised for Turnaround ” – A.M. Best Co. states: “Declining underwriting results and weak investment markets have brought property/casualty insurers to a critical point where future profitability depends on strict adherence to underwriting and reserving discipline – even at the expense of market share.”

The report is both a warning of harder times to come and a prediction that the industry can cope with them. Best pointed out that, “after falling in 2007, net premiums written are expected to show another decrease for 2008, driven by competition in practically all lines and leakage of premium to non-U.S. companies, as well as macroeconomic factors that include the current recession, the credit crisis, the housing correction, rising unemployment and higher energy prices. This is the first back-to-back decrease in premium since 1932-33.”

In addition Best concluded: “Two consecutive years of underwriting profits are expected to give way to an underwriting loss of $21.5 billion for 2008, driven by a continued soft market, sizable and frequent weather-related losses, and the impact of significant losses in the mortgage and financial guaranty sectors.”

According to Best’s estimates, “the industry will recognize nearly $11.0 billion of favorable loss-reserve development in 2008 – even higher than the $9.0 billion recorded in 2007 – thus further eroding the industry’s overall loss reserve position.”

However, the rating agency also notes that,” although policyholders’ surplus decreased an estimated 10 percent in 2008, excess capital absorbed much of the decrease and the over-all industry remains sufficiently capitalized to meet the current challenges in underwriting and the financial markets.”

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Source: A.M. Best