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Editor’s Note: Steven Callahan is a senior consultant and practice director for the Robert E. Nolan Company, a management consulting firm specializing in the insurance, health care, and banking industries.

Uncertainty over election results, the fiscal cliff, and economic direction appear to have been addressed, allowing industry leaders to focus on a return to competitive advantage and sustainable profitability. Even with gradual improvements in the economy, companies remain faced with increasingly costly catastrophe losses and near-term minimal investment returns.

Profitability and rate competitiveness remain hard earned, as noted by the Insurance Information Institute findings that show reaching a combined ratio of 100 no longer delivers the same returns as before. In 1979, a combined ratio of 100 led to a roughly 16 percent ROE; this dropped to 10 percent in 2005; 7.5 percent in 2009/2010; and an estimated 7.0 percent in 2012. As a corollary, the industry has not delivered an ROE above its cost of capital since 2007, implying that insurance is not a profitable industry for new money. 

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