History Lessons

"We haven't turned the corner," he tells me, despite a generally reassuring combination of continued rate firming (though mainly in commercial lines), loss cost control measures and an apparent return to fundamentals.

All in all, he says, we emerge from the first quarter with "a mixed bag" in terms of the warning lights. His rundown:

Rates. Mr. Coyne is encouraged that heretofore anecdotal evidence of rate firming is now supported by the data. The industry posted 10.4 percent premium growth in the first quarter of 2001 and he expects that to continue into the second. He warns, however, that continuing assumptions of double-digit increases in premiums are unsupported in the historical record. In fact, he tells me, there have been few periods since 1956 when average premium increases exceeded 10 percent. Throughout the 1990s, he notes, the industry average was 3.4 percent, while today ISO cautiously assumes 5 percent premium growth.

Expenses. He is "not as enthused" about the quarter's 11.1 percent increase in loss and loss adjustment expenses when that figure is adjusted to normal levels of catastrophe loss. The ISO executive has warned repeatedly that as long as rises in loss and LAE outstrip premium growth, as they did again this quarter, underwriting results will continue to deteriorate. This one's still a warning sign in Frank Coyne's book.

Cat Losses. He casts an equally wary eye on the quarter's dip in catastrophe losses, which ran at unusually low levels. "It's just a matter of when they return to historic levels," he says.

The wait may be a short one, with second quarter cat losses running at the second heaviest levels of the past 10 years. For the entire first quarter of 2001, cat losses came in at $700 million. Throughout the 1990s, they averaged $700 million a month. He reminds you that a slight shift in the course of 1992′s Hurricane Andrew would have produced a whopping $50 billion in insured losses instead of the actual total of $15.5 billion.

Today's worst-case scenario is worse yet, as population and the value of homes and businesses in coastal areas have continued to escalate while outdated building codes require serious and prompt attention. "We just can't assume that cat losses won't return to normal levels," he says.

Investments. "The markets continue to disappoint," says Mr. Coyne. First-quarter investment income fell 2.6 percent–a result of lower yields and portfolio shrinkage. It therefore remains hard-to-impossible for insurers to spin the sow's ear of underwriting madness into the silk purse of handsome investment gains. But the market decline has its upside. "It's a double-edged sword," says Mr. Coyne–concerns on the investment side may be fueling a long-awaited return to fundamentals and discipline on the underwriting side.

Insolvencies. The picture is unchanged from year-end 2000. Mr. Coyne doesn't expect a "run on insolvencies" unless a big catastrophe hits and shakes out overextended companies that are writing bad programs.

Cash Flows. "Modest improvement," says Frank Coyne. "Up a bit, but still very close to record lows." That record came as recently as last year, when the operating cash-flow ratio sank well beneath that of 1984, which was the bottom of the worst p-c underwriting cycle ever.

A&E Losses. Activity is slowing in the area of environmental liability, reports Mr. Coyne. Asbestos liability, on the other hand, "continues to have an impact." With so many asbestos manufacturers bankrupt, dissolved or in Chapter 11, he says, there is a concern that the plaintiff's bar will search for other deep pockets–those who use asbestos or distribute it, for example–thereby increasing insurers' exposure to large claims for some time to come.

Loss Reserves. With no evidence yet that insurers are strengthening reserves, this Coyne warning light stays red. Loss and LAE reserves deteriorated another $3.2 billion in the second quarter.

Combined Ratio. Frank Coyne famously predicted last year that, extrapolating from Y2K conditions, the industry was on track to register a combined ratio of 135.2 by 2005. Today's projection is grimmer still. ISO metrics now put that number at a stunning 142.1 by 2006, assuming five percent premium growth and historically normal catastrophe levels, and adjusting for other areas of distortion, such as A&E losses and reserve deficiencies.

Even assuming 10 percent premium growth–an unreasonable expectation given the historic evidence–the combined would still rise to 114.1 in 2006.

With so many warning lights still switched on, what's the timetable for industry profitability? I ask.

"I couldn't even venture a guess," he says.

As the bottom line begins to improve, led by sustained premium growth, concerns linger that an industry awash in capital will be sorely tempted to jettison its newfound discipline and return yet again to a furious pace of competition.

"On some levels, the picture is already improving. The question is when will it start to deteriorate again," says Frank Coyne–like a man who knows his history.

Thomas J. Slattery, a longtime observer of insurance industry history, is NU's Executive Editor At Large. He can be reached at tslattery@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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