Overall growth and profitability in the property-casualty insurance industry may suffer due to the combined effects of a soft market, the credit crunch and an economic downturn, a leading consultant warned here.

“I think we're in for some challenging times ahead,” said Rebecca Amoroso, vice chair and U.S. insurance industry leader at Deloitte LLP, in a talk during the Inland Marine Underwriters Association's 75th Annual Conference.

Net written premium spiked during the hard market in the wake of 9/11, Ms. Amoroso noted–but with the industry now in the midst of a soft market, she projected that 2008 will see the slowest level of growth since the late 1990s.

Looking forward, Ms. Amoroso cited additional economic factors that may hurt insurer profitability. “I don't think we can ignore what is happening in the economy and the implications that it can and will have on our industry,” she said.

She called the credit crunch and subprime mortgage defaults the most significant economic events to hit in some time. Some in the p-c industry will experience write-downs in certain assets, and there will also be additional exposure to potential losses for those who write directors and officers liability as well as errors and omissions coverage, she warned.

The stock market slump and falling interest rates are putting the squeeze on insurer portfolios as well, Ms. Amoroso noted, as companies are seeing decreased capital gains and lower investment income.

Fears of an economic slowdown and a possible recession will mean slower growth for the industry and for insurers' clients, Ms. Amoroso said. Additionally, she noted that some lines, such as workers' compensation, will experience increased frequency during bad economic times.

She noted the big question looking forward will be how the industry will try to grow in the current market while maintaining underwriting discipline.

“I constantly hear from our clients that they're going to sacrifice growth for profitability,” she said. “But unfortunately, I've heard that story before, so the truth will come out in the numbers. The numbers don't lie.”

On the positive side, Ms. Amoroso said that while most years have seen underwriting losses for p-c insurers, 2006 and 2007 saw record gains. This was due in part to a lack of major catastrophe events, but also to favorable reserve development related to prior years.

Surplus has been growing, and was strong as of 2007. “We are in very good shape as an industry,” she added.

Speaking to macro-trends in the industry, Ms. Amoroso said merger and acquisition activity has been slow in recent years and been trending downward since 2001.

In response to the slow growth in this area, companies have been looking to reduce costs by spending more on technology to streamline operations, scrutinizing claims more carefully and looking for process enhancements, and even expressing some interest in outsourcing and locating offshore, she noted.

There are signs M&A activity may pick up again with a decrease in insurance company valuations making such deals look more attractive, she said. Additionally, she mentioned that the level of surplus among insurers could spark some transactions, as well as the difficulty companies will have growing organically in a soft market.

Some other issues that have the attention of insurers, Ms. Amoroso said, include:

o Compliance with possible regulatory changes, including principle-based reserving and an optional federal charter.

o Continued effective implementation of enterprise risk management.

o Threats and opportunities posed by global climate change.

Special Reports /

Tough Times Forecast For P-C Insurers

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