The moribund economy will combine with zero interest rates to deliver a one-two knockout punch to property and casualty insurer bottom lines, with a significant turnaround in prices and premium volume unlikely before next year at the earliest, industry leaders predicted here.

Indeed, even though “the worst of the financial crisis is over,” according to Jay Gelb, a director at Barclay's Capital, “property and casualty insurers are not going to see premium growth anytime soon.”

Mr. Gelb, part of a panel of analysts speaking earlier this month at the annual P&C Insurance Joint Industry Forum, said that most insurers are “likely to see a decline in premiums due to continuing economic woes.” He cited “shrinking payrolls, failing businesses and a declining number of business startups” as among the factors dampening premium growth.

“Even in 2011, you can expect very moderate growth ahead,” added Joe Guastella, a principal and global insurance leader at Deloitte. “It will be a pretty stagnant market for the foreseeable future.”

Mr. Guastella did note that he expected “some individual companies to experience organic growth, mostly by sticking to their core competencies”–citing “auto writers who expand into new states, or small commercial lines carriers branching out into new industry niches. But you won't see any big growth for the industry overall.”

The mood was similarly restrained among a second panel of industry CEOs at the Forum, where 16 industry associations gather annually to discuss the state of the p&c business.

“Let's face it, the economy is just not very robust right now,” said Thomas Motamed, chair and chief executive officer of CNA. “Exposures are down, and you have tougher buyers out there looking to lower their own costs of insurance. That makes for a challenging market.”

Patrick Thiele, president and CEO of Partner Re, blamed the “unintended consequences” of keeping interest rates near zero for the pressure on insurance company bottom lines. “Going that low [on interest rates] was necessary to save the banking industry and reboot the economy, but it has a negative effect on insurance investment portfolio returns.”

He noted that with reinsurance rates flat at the most recent renewals, there is even less pressure on primary carriers to raise their rates in a shrinking economy.

Mr. Motamed offered a preview of the economic recovery that must play out before the p&c insurance sector will see any renewed growth in premiums.

“Unemployment has to come down and payroll must rise,” he said. “Banks need to loosen up and lend more money to help businesses start up and expand. The housing inventory has to drop so people will start buying homes again. Retail sales need to pick up.”

In the meantime, he added, “you're likely to see more pricing discipline on new business,” as insurers must deliver an underwriting profit to keep their bottom lines in the black in the absence of significant investment returns.

Sandra Parrillo, president and CEO of Providence Mutual, agreed that “we'll need sustained economic growth to see growth in our industry. As demand for our products falls in this struggling economy, competition for the remaining exposures intensifies.”

Describing the p&c business as a “mature market,” Ms. Parrillo said “there's not a lot of new business out there,” which means that “to retain market share, a lot of our growth will come from stealing business from our competitors–especially for highly desirable business,” putting downward pressure on pricing.

Mr. Gelb estimated that the p&c industry is “overcapitalized by 20 percent,” meaning there is far more capacity in the market than demand for coverage. “The biggest challenge for carriers will be what to do with all that excess capital. It will take time to work that excess off. It will not all be burned off in stock buybacks. You're going to need to see some losses [on underwriting] before you'll see any turnaround in rates.”

However, Scott Harrington, a professor of insurance and risk management at the Wharton School, warned that he has “seen excess capital drained in a very short time” by major catastrophes. “So our current situation could be deceiving,” he said.

In a survey of Forum attendees, 51 percent said overall industry premium volume would “remain flat” this year, while 36 percent believe premium volume will fall. Only 14 percent expect growth in premiums written in 2010.

Seventy-nine percent believe insurer combined ratios will rise this year, putting the industry into the red in terms of underwriting results. While 51 percent expect an improvement in profitability in auto insurance, only 37 percent think that way when it comes to homeowners' coverage.

Less than one-quarter (23 percent) expect improved profitability in commercial lines overall, and only 16 percent see gains ahead in workers' compensation–a line stressed by the drop in payroll thanks to millions of layoffs across the economy.

“The economic environment will improve, but only gradually, and we will have difficulty coping with some severe problems related to the 'Great Recession,'” Steven N. Weisbart, senior vice president and chief economist with the Insurance Information Institute–which hosted the Forum–said in a statement following the meeting.

“For example, long-term unemployment–people unemployed for 27 weeks or longer–grew to over 6.1 million as of November 2009, up from about 1.3 million at the start of the recession,” he noted. “Research shows that when these people finally get new jobs, 40 percent will accept lower pay than from their prior job. This affects consumer buying power in general and the workers' compensation exposure base in particular.”

He added that “similarly, business bankruptcies have soared and business formations slumped, so that the demand for commercial insurance in 2010 will rise from a smaller base than would otherwise have been the case.”

While insurers struggle to post profitable underwriting results, according to Mr. Weisbart, little relief can be expected from the investment side of the house.

“Insurers invest mainly in intermediate-term and long-term bonds, and in prior years when interest rates were higher, investment gains could overcome underwriting losses,” he explained.

“But interest rates are likely to stay low for 2010 at least, so that investment gains are again–as in 2009–not likely to provide a large enough source of funds by themselves to generate enterprise returns that meet or exceed a firm's cost of equity capital,” he added.

On two positive notes, 77 percent of those attending the Forum said “the worst of the financial crisis is behind us,” while 72 percent “expect another up-year in the equity markets”–perhaps setting the stage for better insurer results in 2011.

However, 71 percent said they expect “inflation will accelerate in 2010,” which could hike loss costs. Indeed, Mr. Gelb cited the risk of inflation as one of the biggest long-term threats to the p&c industry.

Special Reports /

P&C Prices To Lag In Shrinking Economy

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