ISO's CEO: Don't Get Risky In Soft Market

ISO's CEO: Don't Get Risky In Soft Market

NU Online News Service, Nov. 19, 3:18 p.m. EST?For the second time in as many weeks the Insurance Services Office chief executive has warned attendees at an insurance industry conference they should not pursue volume and risky business as premium prices start to decline

Speaking to the Society of Insurance Research in St. Pete Beach, Fla., Frank J. Coyne cautioned again that "each improvement in insurers' results brings us closer to the next round of hyper-competition for market share."

Mr. Coyne, who is also chairman and president of Jersey City, N.J.-based ISO, said that ISO is projecting a slowdown in industry growth from 9.2 percent this year to 6.1 percent next year with combined ratio improving from 102.9 this year to 101 in 2004

As he did on Nov. 5 in an address to the ISO Tech Conference in California, Mr. Coyne noted the industry cyclical history where each improvement in results leads to soaring competition.

Excesses following the current recovery could plunge the business back into another prolonged drought in profitability, he said.

Mr. Coyne said average annual return on surplus (assets minus liabilities) fell from 13.7 percent in the 1970s to 10.3 percent in the 1980s to only 8.7 percent in the 1990s. And "in the first three years of this decade, the industry's rate of return has averaged just 2.8 percent."

Achieving strong returns in the current business environment, is harder than it used to be, said Mr. Coyne. "Consider that with a first-half 2003 combined ratio of 99.8 percent, the industry's annualized rate of return was 9.7 percent?well short of the 15 percent rate of return equity investors look for." (Combined ratio measures losses and other underwriting expenses per dollar of premium).

The last time the industry posted a first-half annualized rate of return of 15 percent was 1987, he said, when the combined ratio was 104.1. "To achieve a 15-percent rate of return with today's leverage, investment results and tax rates, the industry would have to post a combined ratio in the neighborhood of 94.4? something it has never achieved on an annual basis," said Mr. Coyne.

"The message should be clear. What used to be good enough is not good enough any more," he added.

Mr. Coyne cited increasing evidence of an end to the hard market.

ISO MarketWatch research shows rate increases for commercial policies peaked at 12.9 percent in July 2002 and have been on a downward slide ever since, dropping to 7.7 percent this past June. A third-quarter survey by the Council of Agents and Brokers shows rates flattening in many segments of the commercial market, with rates actually falling in some.

"If the next soft market is not already upon us, the hard market certainly is coming to a close," Mr. Coyne said.

In a soft market, he warned, insurers have paid dearly for failing to adhere to disciplined underwriting and cost-based pricing." Commercial policyholders, he said, "have increasingly turned to alternative mechanisms such as captives, risk retention groups and the like." Alternative mechanisms' share of the commercial market has doubled from slightly more than a quarter in 1985 to just about half today, he added.

Another serious consequence of competitive excesses, he noted, has been an increase in insolvencies." Sustainable profitability can only be achieved through sound risk assessment?cost-based pricing, solid underwriting and strong loss adjudication?not slavish devotion to growth and na?ve reliance on investment gain from fickle financial markets," he advised.