Analysts and industry experts queried for the Insurance Information Institute's annual “Early Bird” survey expect insurers in 2007 to follow a banner year with lower profits and stagnating premium growth, thanks to a worsening pricing environment.

This comes on the heels of a strong 2006, when low catastrophe losses combined with a strong performance in virtually all other major lines of property-casualty insurance to propel the industry to its best underwriting performance since 1955.

However, those polled uniformly expect premium growth to be sluggish in 2007, the Institute noted.

The “apparent paradox of a peak in profits but stalling premium growth is a reminder of the highly cyclical nature of the property-casualty business and the fact that the industry's financial fortunes are determined by a myriad of factors,” the Institute noted.

The average forecast calls for an increase in net written premiums of just 1.5 percent this year–a substantial slowdown from 2.8 percent estimated for 2006. Analyst predictions for 2007 premium growth range from 0.4 percent on the low end, topping out at just 3.1 percent on the high side.

If the 1.5 percent average forecast for an increase in premium growth holds true this year, that would be the second-slowest rate of growth for p-c insurers since 1998, during the depths of the last soft market, the Institute noted.

Predicted slowing of premium growth in 2007 was called a direct result of “a virtual across-the-board softening in the personal and commercial lines pricing environment–the sole major exception being hurricane-exposed coastal property insurance coverages, as insurers look to charge premiums that are commensurate with the substantial risk assumed.”

The Institute noted that premium growth peaked during the most recent cycle at 14.6 percent in 2002, before dropping to 9.8 percent in 2003. It also noted that premium growth for full-year 2006 will come in well below the average of analyst expectations from a year ago. In last year's Early Bird survey, the consensus estimate was for net written premium growth of 4.7 percent.

Indeed, nationwide auto insurance exposures are expected to fall 0.5 percent in 2007 (the first drop since 1999), while businesses will see declines of 5 percent or more across their entire commercial insurance program.

Overall, the share of p-c insurance premiums relative to the overall economy will shrink by about 3.5 percent in 2006, and by 3.1 percent in 2007, according to the survey.

Although top-line growth has slowed to a near standstill, profits (measured in dollar terms) and profitability (measured as a return on equity) are rising, the Institute noted. Most industry profits in 2006 will be plowed back into the business bolstering surplus, according to the Institute.

The combined ratio of losses and expenses to premiums is projected to be 97.6 for 2007, deteriorating from an estimated 94.3 in 2006.

Underwriting profits will likely fall this year by approximately 50 percent from 2006 levels, and the slimmer margin of underwriting profitability will be eliminated entirely if catastrophe losses return to 2004/05 levels, the Institute warned.

With an ROE of about 15 percent, 2006 insurance sector results will match that of the Fortune 500 group for the first time since 1987, the Institute noted.

Among major external risks, terrorism remains a key insurance industry concern, despite the two-year extension of the Terrorism Risk Insurance Act signed by President George W. Bush on Dec. 22, 2005, according to the Institute. However, the extension–which expires Dec. 31–pushed considerably more risk onto private insurers, the Institute noted.

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Early Birds See Pricing Worms Eating Away At Insurance Industry Profits

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