P-C Sector Future Called Murky

NU Online News Service, Feb. 25, 10:25 a.m. EST?Property-casualty insurers as a whole are enjoying higher profitability, but continuing problems are dogging the industry, which suggests its future may be lass than sparkling, according to Ernst & Young consultants.[@@]

The firm's examination of the financial services industry found it unlikely that p-c rate hikes will continue for much longer, although they will continue this year. On the commercial side, rate increases visibly moderated last year, according to the report written by Peter Porrino, E&Y director of insurance industry services.

E&Y suggested that pricing alone cannot return the p-c sector to its fullest profitability. Loss reserve deficiencies and other issues across the commercial lines and reinsurance sectors are clouding the sector's outlook, E&Y said.

It found problems with reinsurance recoverables, and predicted more downgrades and increased runoff activity for troubled companies in that sector.

The firm also questioned whether insurers "will be able to resist reducing prices in 2005 and beyond" and be able to keep pace with claims inflation.

E&Y noted that combined ratio since 2001 has improved from the 112 level to around 93 to 95 for 2003. "We expect these levels of profitability to continue in 2004, aided by continued?but lower?rate increases," the firm said. Examining individual parts of the industry, E&Y noted that the homeowners line had returned to profitability, while the medical malpractice sector has continuing problems pricing for long-tail claims.

At this point, many homeowners insurance companies have reported 2003 combined ratios in the 80s, the study found.

Property-casualty insurers' ability to collect on reinsurance claims is tagged in the report as "another major challenge, and one that is under a great deal of scrutiny."

E&Y said reinsurers have been affected by the insurance industry's recent difficulties and, as a result, some have been either unable or unwilling to pay their obligations, resulting in insolvencies, rating agency downgrades and, in some cases, companies going into runoff. "More are expected to do so," the report said.

E&Y called rating drops for the reinsurance sector "dramatic," with the number of "AAA"-rated companies shrinking from seven down to one, and said many European reinsurers are "being scrutinized for solvency." The report warned readers not to be "surprised by further downgrades in this troubled sector."

Outstanding reinsurance recoverables for all insurers stand at 60 percent of policyholders' surplus, the report noted.

Discussing last year's St. Paul/Travelers merger, E&Y said they see no signs of a trend because in the p-c sector, "balance-sheet issues are presently so severe that it is unlikely many acquisitions will occur over the next few years."

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P-C Sector Future Called Murky

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