Moody's Ups P-C Personal Lines Outlook

In its new report on the industry's outlook for 2003, Moody's cited a number of improvements in the current market environment.

"One is insurance companies' focus on rate increase and profit versus the growth model," Marc Serafin, an analyst at Moody's and the author of its annual report on p-c personal lines, told National Underwriter.

"Price increases are expected to moderate this year. However, we expect that pricing discipline will continue," he predicted.

While the overall personal lines insurance industry is posting better results, improvements from personal auto is farther ahead compared to the homeowners insurance.

Moody's noted that the turnaround in homeowners' results is occurring more slowly in comparison to the auto segment because the profitability problems in homeowners' were much deeper. Plus, homeowners' policy terms are typically one year versus the six-month standard in personal auto, meaning it takes homeowners insurance carriers much longer to incorporate rate and underwriting changes.

Mr. Serafin found that personal lines insurers have shifted their focus towards restoring "old-fashioned" underwriting profitability because of the disappearance of favorable market forces that they used to depend on.

Mr. Serafin said that years of emphasis on market share growth at the cost of competitive underpricing finally caught up with personal auto insurance carriers in 1999 and 2000 and created significant profitability problems. So carriers, seeking to reverse this trend, took a number of positive steps, including raising rates, reinvigorating underwriting discipline and cutting costs.

Mr. Serafin said that this new emphasis on core operational performance started to show up in the industry's bottom line last year.

There are several other market forces that have been persuading insurers to focus on their underwriting performance, Moody's said. Among them is the depletion of redundant reserves, which companies previously used to help them cope with intense price wars and poor homeowners' results.

Carriers can no longer boost earnings with reserve releases, Mr. Serafin said. In fact, he pointed out Moody's reserve analysis, which shows slight reserve deficiencies despite some improvement in homeowners since 2000.

Another impetus for insurers to improve their underwriting operations came from declining investment incomes. "Investment losses and write-downs have been commonplace throughout the industry," Mr. Serafin said. "Lower investment yield expectations will also serve to lengthen the current pricing cycle."

Technology has also begun to play a big role in improving operating efficiencies, Moody's suggested. "U.S. p-c insurers have enhanced their technological skills and data analysis capabilities to assist them in their return to profitability," said Ted Collins, Moody's managing director for p-c and reinsurance.

He said these technological changes would not only help companies to achieve lower combined ratios, but could also moderate the inevitable industry cycle in the future.