While insurance executives at a meeting here last week agreed that profits will fall in 2007, experts said premiums charged will truly reflect risk–not competitive pressures–arguing that industry fundamentals have clearly changed.

“You're seeing more of a focus on risk than ever before,” said Matthew Mosher, group vice president of global property-casualty ratings for Oldwick, N.J.-based rating agency A.M. Best Company. He said that risk-based premiums are particularly notable in commercial lines, where there is typically more flexibility in pricing exposures.

“It's the focus on the risks themselves that is causing prices to soften,” he said, noting that loss cost trends have been more benign in recent years.

Mr. Mosher made his comments during a panel discussion at the annual Property-Casualty Insurance Joint Industry Forum here. He was responding to a question posed by the moderator, Robert P. Hartwig, president of the New York-based Insurance Information Institute–one of 15 industry groups sponsoring the forum.

Mr. Hartwig–who pointed out that net written premium growth, which was 14 percent for the industry in 2002, is expected to fall to the 1-to-2 percent range in 2007–asked Mr. Mosher if the drop gave him cause for concern from a ratings perspective.

“We're not seeing the level of rate cutting that would [suggest] undisciplined pricing,” Mr. Mosher said, noting that loss costs are also dropping in major insurance lines such as personal auto.

Typically, the auto line–the largest written by p-c insurers–will drive premium growth for the industry overall, he said, noting that safety initiatives continue to push claim frequencies down.

“I think you're always going to see a little bit of push in terms of aggressive pricing, but the focus [going forward] is always going to be on the risk,” he said.

At a later session, Paula Rosput Reynolds, chief executive officer of Seattle-based Safeco, said: “We don't see anybody making any large [competitive] moves.”

“Against the backdrop of all the rhetoric on discipline, what logic would there be in trying to go and get really aggressive….It seems so fundamentally counterproductive,” she added.

Ms. Reynolds said that everyone in the business is putting more money into automated underwriting. As a result, “it's really difficult to go and start being arbitrary about the product,” she reasoned.

Beyond pricing discipline, panelists attributed the current level of underwriting profitability to improving claim frequencies–fueled not just by auto safety initiatives, but improving tort trends, including moderating jury verdicts.

Still, more than three-quarters of the industry executives attending the forum and responding to an on-site survey predicted combined ratios would increase in 2007.

Mr. Hartwig noted that if the overall combined ratio does rise, it will be moving up from an expected 2006 full-year figure in the low-90s–potentially the best in 60 years.

However, such positive results could have a downside in terms of pricing, others speculated. Indeed, Jay Gelb, senior vice president and equity analyst for New York-based Lehman Brothers–noting that nine-month 2006 combined ratios for commercial lines were below 90 and in the low-90s for personal lines–said such stellar results “could attract increased competition.”

He predicted that particularly in commercial lines, there could be “compression in pricing and underwriting results both in short-tailed and long-tailed lines in 2007.”

Still, he said overall profitability is sustainable. He explained that only part of the reason for the historic low combined ratio achieved in 2006 was attributable to a low level of catastrophe losses–a factor that he characterized as “an outlier.”

“The other part–and what I think will be sustainable–is that the industry's balance sheet is in the best shape it's been in the best 10 years,” he said, noting that announcements of prior-year unfavorable reserve developments have waned, while favorable loss developments for recent years have started to emerge.

Mr. Mosher agreed. “We're seeing more margin [in reserves] than we originally anticipated being put up for recent accident years,” he said, attributing some price-lowering actions to the corresponding abilities of insurers to take down reserves.

Mr. Gelb predicted that in 2007 net earnings overall will probably remain flat, statutory surplus will grow and return-on-equity will therefore compress a little, coming in at 10-to-13 percent through 2008.

Mr. Hartwig said the industry ROE for 2006 is predicted to come in at roughly 14.5 percent–the best in 20 years.

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Risk-Based Pricing Leads To Falling Rates

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