Insurance Industry Outlook Improving, Slightly

December 6, 2010

The insurance industry is recovering from the economic crisis, but profits are nowhere near where they were prior to the crisis, and it will take California longer than other states to rebound, according to an industry economist.

The property/casualty insurance industry will see growth in 2011 — the first time since 2006, according to Robert Hartwig, president of the Insurance Information Institute. Increase in demand for commercial insurance is in its earliest stages and will accelerate in 2011, he said. Some growth areas include workers’ compensation, commercial auto, marine and many liability coverages.

In a recent presentation, “Overview and Outlook for the P/C Insurance Industry: Challenges and Opportunities for 2011 and Beyond,” Hartwig also cautioned the industry not to expect a dramatic turnaround from the financial crisis the past few years.

In 2010, Hartwig said the insurance industry’s personal lines combined ratio is expected to remain stable, while commercial lines and reinsurance combined ratios will deteriorate. Personal lines direct written premium will show growth in 2010, he said, while commercial lines is expected to continue to shrink because rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession continue to weigh on commercial lines.

There will be regional differences across the country, however. Economic growth, which helps to stimulate the insurance economy, will be fastest in the plains and mountain states thanks to growth in the natural resources and agricultural sectors, Hartwig said. On the other hand, California’s economy is performing poorly, and can be expected to rebound slowly.

California’s direct written premiums declined 15.2 percent from 2004 to 2009, while 27 states and the District of Columbia had positive premium growth over the past five years. In contrast, North Dakota saw a 65 percent increase in premiums written in over the past five years. Hartwig said California’s economy would be slower to rebound from the economic crisis because among other things, it was hit harder by housing bubble, has seen a significant amount of job losses, and has a tougher business climate.

Additionally, while California may not be a “judicial hellhole,” for insurers, the fact that it has consistently had a pretty bad report card on tort costs and ranked in the bottom five of worst states for tort reform should be a concern, he said. Businesses are fairly heavily regulated in the Golden State and business leaders ranked it among the worst states in terms of liability.

The entire nation’s insurance industry, in fact, is being threatened by rising tort costs, Hartwig said. He noted there has been no recent tort reform lately, and previous reforms that brought down jury awards have been eroded. California had the top 10 costliest jury verdict in 2009 at $370 million over a defamation case.

“Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability,” Hartwig said. And once tort costs start to escalate, that will be costly for businesses and insurers, and “extremely costly” to the property/casualty industry because it drives up prices on existing business, he explained.

Hartwig said the new House expected to begin in January can be expected to be receptive to the idea of federal tort reform, but fewer new pieces of legislation are likely to spawn tort actions. Meanwhile, he predicted businesses will see more discrimination and retaliation lawsuits, especially as companies have downsized their workforces.

Because of the results of the midterm elections will have some impact on the insurance industry, he said, but none appear to be major. For instance, catastrophe financing has disappeared, Hartwig said. He noted Rep. Neil, D-Fla., who had proposed a larger role for the federal government in financing natural catastrophe losses was defeated, as was Rep. Gene Taylor, D-Miss., who had supported adding wind coverage to the National Flood Insurance Program.

And while Republicans talked about overturning “Obamacare” on election night, Hartwig said it’s unlikely health care reform legislation will be repealed and replaced because the Senate and White House are still democratically controlled.

With regard to the Dodd Frank Wall Street Reform and Consumer Protection Act, Hartwig said he didn’t expect much change because of the legislation. One positive is that Title V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance.

The Financial Stability Oversight Council and the Office of Financial Research have been created to oversee systematic risk of large financial holding companies. He said the only concern would be if P/C insurers are determined to present systemic risk to the nation’s financial system, then they could be supervised by the Federal Reserve, subjecting insurers to prudential standards. On the other hand, while the Federal Insurance Office (FIO) has been established, and has within the Department of Treasury, headed by a director appointed by the Secretary of Treasury, the office is primarily only going to oversee TRIA, he said.

Overall, insurance industry can expect to see relatively minor changes in 2011, Hartwig predicted. He said small businesses and high-net-worth individuals and their insurers in particular are likely to benefit slightly from a more Republican Congress supporting tax cuts and taking a more pro-business stance. But because investment gains will be tougher to come by, insurers will need to focus more on underwriting profits.

Insurers did well in the financial crisis, he said, but they are now earning about half on their investment portfolio that they did prior to the economic crisis, he explained. So now, money needs to come from rates. “Investment earnings are not sufficient to meet demand in losses,” he said.

Looking at 2011 and beyond, the bad news is that “the new [insurer] investment reality hasn’t seeped into pricing yet,” Hartwig said, emphasizing that insurers are going to need to focus on underwriting profits in the future. The good news, however, is that with the unemployment rate and some industries are improving. “Economic obstacles to growth in the property/casualty industry are slowly being cleared away,” Hartwig said.

Hartwig was a featured speaker at the Golden Gate RIMS Annual Bay Area Conference held in November.

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