Generally speaking, the economy is more resilient than mostpundits presume but nevertheless will continue to face prolongedstagnation in the next couple of years. The downtrend in economicindicators, along with shrinking investment income projections arechief conditions guiding the latest edition of Conning's“Property-Casualty Forecast &Analysis” report.

In the forecast, which projects P&C industry growth andperformance from 2011-2013, the Hartford, Conn.-based firm offers adecidedly “gloomy” view for insurers. An overriding concern is thatafter the compression of revenues in recent years, many anticipateda rebound in both the economy and in interest rates, neitherof which occurred.

“Not only has economy faltered, but concern about the economyhas increased,” explained Clint Harris, analyst at Conning Research& Consulting. “The government has been trying to recharge theU.S. economy by keeping interest rates low enough to encourageinvestment. The consequence of all of this is that bond yields havegone lower, and that is a significant driver in revenue forinsurers.”

“Therefore, Conning's 2011 premium growth forecast has decreasedwith the sliding economy to only 2 percent to 3 percent,” Harriscontinued. “The industry forecast combined ratio, north of 106percent, includes additional deterioration in the underwritingresults and adjustments for the record catastrophe activity of thesecond quarter. Of course we are closely watching second-halftropical storm results.”

Conning issues such analyses on a quarterly basis, with thefocus of each typically varying, depending on marketconditions and stressors. For this latest iteration, the firm'sanalysts targeted premium loss and investment returns for theentire year for 2011, 2012, and 2013.

Harris said that findings from the second quarter wereworrisome when compared to the previous analysis at the end of thefirst quarter. Economic concerns in the U.S. and abroaddeepened, in no small part because of the record-breakingnumber and expense of catastrophe loss on the global scale. As ofJune 30, 2011 was already considered to be the highest loss year onrecord globally. The I.I.I. estimated $260 billion in economiclosses during the first six months of the year, exceeding theprevious record of $220 billion in 2005.

Earlier this month, Steven Weisbart, P.h.D., CLU, senior vicepresident and chief economist at the Insurance InformationInstitute (I.I.I.), presented an overview of the economy andP&C insurance industry both globally and in Canada. Weisbartdiscussed the effects of the 2011 disasters, inflationtransmitted globally, and increased political risks in his specialreport, citing the most costly world insured losses in the pastthree decades (see figure below).

It should come as no surprise that insurers' concerns deepenedas well. So how does premium erosion (and the resultantdecrease of underwriting margins) bode for the P&C industry?

“There is some better news here,” Harris said. “All ofthese things can lead to insurers becoming more conservative. Moreinsurers are starting to talk about areas where they see premiumrate firming. This is a condition that normally comes ahead ofa true turnaround of underwriting cycles.”

“When insurers become stressed in terms of underwriting marginsdecreasing and, in this case, also investment margin decreasing,there has to be some proactivity,” Harris added. “Oneshort-term solution is managing operating expenses moreaggressively, and carriers have embraced this. Although that canresult in increased workloads and maybe fewer hires, mass layoffsare very unlikely. In some cases, a portion of the decisions arebased upon this is temporary condition. Othewise, the industry willbe looking at a more long-term solution.”

Like Harris, Weisbart accentuated the longer-term issuesplaguing the industry in the coming years, including:

• Persistently low interest rates and lower investment income.These put added emphasis on underwriting profit.
• Currency market instability
• Sovereign bond market concerns – Greece, Spain, Ireland, and soon.

“The expected forecast drivers for 2012 and 2013 are strongereconomic growth than in 2011 and expanding rate-firming incommercial lines, with negative offsets on investment income,”added Stephan Christiansen, director of research at Conning. “Weforecast an increase in both exposure and premium rate growth foreach year, but rate firming is short of what should be interpretedas a broad turn in the underwriting cycle. Certainly, the falteringeconomic recovery has worsened exposure growth expectations.However, the decline in expected investment yields for 2011 and forthe next couple of years is becoming an even more significantfactor driving industry expectations.”

Conning's full report is available for purchase on thecompany's website.