Insurers To Break 100 For 05 Combined Ratio

Premium growth should slow down to 3.4 percent, although E&Y is more pessimistic

In 2005, the property-casualty insurance sector will realize its first underwriting profit since 1978 even as industry-wide net written premium growth slows to 3.4 percent, the Insurance Information Institute predicts.

According to the New York-based Institutes “Early Bird Forecast,” the industry's combined ratio is projected to be 99, down from the 100 estimated for 2004 and the 100.1 recorded in 2003.

The forecast would represent a vast improvement over the terrorism-impacted 115.7 result in 2001, and it would also mark the first underwriting profit in the property-casualty insurance industry since 1978, the group noted.

The predictions are based on the averages of responses submitted by Wall Street stock analysts and industry professionals surveyed about the sectors current status and future prospects.

“The survey reveals that the industrys effort to recover from its worst-ever performance in 2001 ran into hurricane force headwinds in 2004, as the quartet of storms that struck the Southeast Coast transformed what would have been the industrys best year in decades into a breakeven performance,” according to Robert Hartwig, senior vice president and chief economist at the Institute.

There is still a chance that the bottom line for 2004 will show an under-100 combined ratio, even though the current projection stands at the breakeven point. Indeed, had catastrophe experience in 2004 been “normal,” without $20.5 billion in estimated losses from four hurricanes, the year's combined ratio would have been in the neighborhood of 95its lowest level since 1972, Mr. Hartwig pointed out.

On the industry's premium growth, the Institute said the average forecast calls for a 3.4 percent increase in net written premiums in 2005, down from an estimated 4.8 percent for 2004.

In contrast to previous years, when gains were mostly the result of higher rates, the sharp weakening in the pricing environment over the past year means that current gains are more directly attributed to higher exposure growth and higher demand related to the current economic recovery, the Institute noted.

In 2005, the Institute said, analysts expect little change from 2004, although on a catastrophe-adjusted basis the cyclical deterioration in underwriting performance will begin to further materialize, Mr. Hartwig said.

“While not directly impacting the operating performance of insurers, 2004 is likely to be remembered as the year in which New York State Attorney General Eliot Spitzer initiated an investigation of some insurance industry practices,” according to Mr. Hartwig.

“The ultimate impact of this investigationwhich has resulted in at least two dozen additional probes launched by state attorneys general and insurance departments around the countryis still unknown,” he added. “However, insurer and broker expenses are certain to rise in 2005 as compliance costs increase as new regulations come online and fines and penalties are levied and paid.”

What are the “biggest potential downside risks” for 2005? “High on the list,” according to Mr. Hartwig, is a “loss of pricing and underwriting discipline. Differing views on the likelihood of pricing discipline being maintained likely explain the disparity among analysts forecasts for net written premium growth in 2005, which range from 1.1 percent on the low end to 6.0 percent on the high side. So far, pricing is clearly easing but cannot yet be characterized as destructive.”

Indeed, a more gloomy prediction was issued by Ernst & Young in its “State of the Financial Services Industry Report.” E&Y said p-c price competition makes its profit outlook “pessimistic,” noting that rate increases for commercial policies on average are now below 10 percent, with competition driving them down further.

“Rate increases for the commercial property segment are now in negative territory, also foretelling lower ROEs. The hurricanes in Florida may decelerate the rate of decline, but that wont fundamentally alter the trend toward price reductions,” the report said.

According to E&Y, it is “only a matter of time before the total commercial line breaks the zero barrier and follows commercial property into negative territory.”

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Insurers To Break 100 For 05 Combined Ratio

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