Marine Insurers Outperform P-C Market

"While the industrywide combined ratio was 116 percent, AIMU members posted a more-respectable 98.9 percent. That represents a further improvement from the nearly 102 percent combined ratio from 2000," added Ms. Littlefield, who is senior vice president and business unit head of special lines for Swiss Re's Americas division.

However, she added, "clearly, we still have a ways to go before getting below 91.6 percent–the magic number needed to cover capital costs."

The improved results were driven by the performance of the U.S. marine market's two largest lines–cargo and yacht, she noted. The combined ratio for cargo in 2001 was 86.1, while yacht reported a ratio of 93.4.

For many of AIMU members, she explained, these two lines have been subsidizing their overall writings as other marine lines continue to show extremely poor results.

For example, last year, offshore risks had a combined ratio of 152.9, while ocean hull showed 113.1, and brown water hull reported 117.1.

She said it is difficult to forecast what the final results will be for 2002, since there are some wild cards, including this year's port strike on the West Coast, a bridge collision in Oklahoma, and a number of other recent large losses.

"Overall, I believe marine insurance has at least kept pace with the rest of the industry in moving to secure more adequate pricing in 2002," she said.

A September report from Aon Corp., she noted, "said the domestic marine insurance market continued to harden throughout the third quarter of 2002. Moreover, our operations are well capitalized. Risks will continue to gravitate to marine carriers with financial strength. I believe that gives U.S. marine underwriters a competitive edge."

But marine insurers also face other difficulties after Sept. 11, 2001, with the new challenges extending beyond those of a highly competitive marketplace and an uncertain global economy, she said, noting that the threat of terrorism has created an unprecedented level of tension.

If an explosive device was loaded in a container and set off in a port, it would raise concerns about the integrity of the 21,000 containers that arrive in U.S. ports every day, she said.

In addition, a three-to-four week closure of U.S. ports because of security concerns or labor dispute would bring the container industry to its knees, according to a report by an independent task force of the Council on Foreign Relations, she noted.

"As this system becomes gridlocked, so would much of global commerce and, I should add, so would worldwide marine insurance," according to Ms. Littlefield.

"The U.S. is trying to address this issue in a number of ways," she added. "AIMU has supported tough provisions of the Port and Cargo Security bill that, unfortunately, is still pending before Congress."

Overall, it's hard to recall a time more turbulent than the one the property-casualty industry faces today, according to Ms. Littlefield, who is being succeeded by AIMU's senior vice president, David French, who is president of New York-based American International Marine Agency. Mr. French will take the organization's helm for the next two years.

However, the early results from this year indicate that progress is being made in restoring industrywide profitability compared to 2001, when U.S. property-casualty insurers reported their worst-ever rate of return–negative 2.7 percent–along with a combined ratio of 116 and an 8.7 percent decline in industry surplus to below $300 billion, Ms. Littlefield noted.

"We have a long way to go in digging ourselves out of this hole created, to a certain extent, by a decade-long price war, in addition to declining investment returns, mounting losses from natural catastrophes and, of course, 9/11," she said.

For the first half of 2002, the p-c industry earned $4.6 billion in net income after taxes, according to industrywide figures compiled by the Jersey City, N.J.-based Insurance Services Office, and the National Association of Independent Insurers in Des Plaines, Ill.

The industry also had a statutory rate of return of 3.3 percent for the period. But unfortunately, that rate of return is only one-fourth of the sector's 12 percent cost of capital–the minimum rate of return the industry needs to retain and attract capital over the long run, Ms. Littlefield noted.

"Despite the significant improvement in underwriting performance evident in this year's first-half results, the gap between the industry's rate of return and its cost of capital remains unacceptably high," she said. "This gap will not be closed in the second half of this year, nor is it likely to be closed by the end of 2003, especially if financial markets continue to swoon."

She also referred to a recent study from Moody's Corp. that shows how challenging it will be to close this rift.

"It points out that a mid- to high-90s combined ratio simply does not cut it anymore in today's interest environment," she said. "It concludes that for the industry to earn a 12 percent rate of return, the combined ratio needs to be 91.6 percent. Its motto–'It's 90 or Bust'–should be a wakeup call to an industry that posted a combined ratio of 116 percent in 2001," she added.