The year ahead is likely to be another profitable one for property-casualty insurance as a whole–but the big question is how long the party will last, given the industry's competitive drive and the ever-present threat of a mega-catastrophe, analysts at the annual Joint Industry Forum here agreed.

Even as one prominent investment house predicted a p-c industry 2006 return on equity of 15 percent–quite high by historic standards–analysts here were also worried whether pricing and bottom-line results would head south if competition heats up.

Despite record catastrophe losses, the industry posted solid gains last year and even a possible underwriting profit for only the second time in over 25 years, the analysts noted. However, concerns were voiced over how long pricing discipline would prevail, or whether it would take another Katrina-like event this year to keep the lid on temptations to price aggressively for revenue and marketshare growth at the expense of profitability.

In 2006, “executives may just say we are making money, so why don't we just keep doing what we are doing?” suggested Brian Sullivan, editor of Dana Point, Calif.-based Risk Information Inc., during an analyst panel at the forum, co-sponsored by 13 p-c trade groups, led by the Insurance Information Institute. However, he warned, he does not discount the possibility that “someone will come up with a strategy that calls for cutting pricing to gain marketshare.”

Indeed, some troubles lurk beneath the current numbers, observed V.J. Dowling, managing director of Farmington, Conn.-based Dowling & Partners Securities. “Homeowners is not as profitable as everyone thought it was,” he noted, “and auto rates are not going up while costs are, but the fact is we are having fewer accidents each year and that can't go on forever.”

Mark Puccia, chief quality officer for insurance rating criteria at Standard & Poor's in New York, said he doesn't expect 2006 to match last year's performance, which in turn was based on a “wonderful claims experience.” On the positive side, he added, “there is an awful lot of information out there” to fine-tune underwriting and pricing decisions, “and hopefully that will shore up the results this year.”

All agreed that the Florida catastrophe market is virtually dysfunctional. “There is no rational reason why any company would put any capital in that state,” according to Mr. Sullivan. However, until the ability to purchase a home is threatened by a severe insurance capacity shortage, no drastic corrective measures will be taken, he added.

S&P's Mr. Puccia warned not to look to the federal government for solutions, contending that “the degree of distrust for the industry in Washington cannot be underestimated.”

Such distrust–which forum panelists suggested had hampered efforts to extend the Terrorism Risk Insurance Act last month–will make it that much harder to craft any long-term program to better deal with catastrophic risks, forum speakers said.

The heads of Allstate, State Farm and Nationwide came out in varying degrees during a CEO panel here in favor of a proposal to provide federal and state backing for natural catastrophe exposures similar to the federal reinsurance mechanism provided for terrorism risks under TRIA.

Allstate's chairman, president and CEO, Edward Liddy, whose company has been busily lobbying for such a program over the past several months, proved the most enthusiastic advocate for the proposal.

The industry, however, remains divided on the issue, with giant property-casualty insurers such as Liberty Mutual coming out against it, along with opposition from the American Insurance Association and the National Association of Mutual Insurance Companies.

Mr. Liddy's colleagues are not optimistic that the effort will succeed. A poll of those attending the forum found only 3 percent believing it has a chance of being passed by Congress this year. “I voted three times,” joked Mr. Liddy.

The Allstate CEO said the inability of any company to accumulate sufficient profits in good times due to regulatory constraints to pay for bad times when major disasters strike means government involvement is required.

State Farm's chairman and CEO, Edward Rust, as well as Nationwide CEO W.G. Jurgensen also expressed general support for the concept. However, not one executive at the forum backed a proposed all-perils policy, including flood exposures, which is part of the current National Association of Insurance Commissioners' proposal under consideration.

The panelists also agreed the industry will prevail in lawsuits by those in Gulf States who contend that hurricane-related water damage is covered despite flood exclusions in standard homeowner policies.

Mr. Jurgensen said that as an experiment, he took the front page of a standard homeowners' insurance contract to sixth- and seventh-graders, who all understood the difference between wind and flood damage. “So now my general counsel and I are trying to figure out how we can parade them through a Mississippi courtroom,” he said.

Other storm-related topics included the huge stress the storms placed on claims operations and the need for enlarging current insurer adjuster staffs so those sent into stressful catastrophe sites can have their tours of duty shortened.

“We have grossly underestimated the emotional toll these storms have wreaked upon claims adjusters,” Mr. Jurgensen said, noting in some cases they have been threatened with violence from angry claimants. Allstate's Mr. Liddy added that many adjusters from the New Orleans area were “heroic” in that they continued to settle the claims of others, “working without days off or a true home after losing everything they owned in the same hurricane.”

Special Reports /

Analysts See Profits Ahead, But Cite Concerns Over Catastrophes, Competition

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