Industry Recovery Underway, But Its Far From Complete
When Charles Dickens wrote that "it was the best of times, it was the worst of times" in "A Tale Of Two Cities," he was referring to the state of society during the French Revolution, but he might as well have been summing up the state of todays U.S. property-casualty insurance industry.
At first blush, the latest financial news is glowing. The industrys net income soared to $14.5 billion in the first half, more than triple the figure recorded in the same period a year earlier. The industrys underwriting bottom line was better than it has been in decades as the combined ratio fell to 99.8down 5.3 percentage points–the best its been since 1986, and the first time this key benchmark fell below 100 since 1978, when it dipped to 97.4.
In addition, the industry reversed the recent trend of draining its piggy bank, as surplus rose 9.9 percent to $312.5 billion, a hefty gain of $28.2 billion, thanks in part to realized and unrealized capital gains in a recovering stock market, as well as an 11 percent bump in net written premiums.
All this good news comes despite a big increase in catastrophe losses, which nearly doubledfrom $3.4 billion in first-half 2002, to $6.5 billion this year. Take away the boost in cat losses, and the combined ratio would have been an amazing 98.2.
However, before consumer activists pounce on these encouraging industrywide results compiled by the Insurance Services Office and the National Association of Independent Insurers to declare that the problems facing p-c insurers are over, and to start demanding rate rollbacks, take a closer look at the numbers. This industry still has a long way to go before declaring its recovery complete.
As ISO and NAII noted in their first-half report, even with a 231.6 percent hike, the industrys first-half net income was still 2.5 percent lower than in the same period of 1999, and 22.5 percent below first-half 1997. Also, first-half surplus is 1.5 percent lower than it was at the end of 2000, and 7.9 percent below its peak of $339.3 billion on June 30, 1999.
In addition, even though the combined ratio finally broke below the 100 barrier, most industry observers say the real magic number for insurers if they expect to see any significant profitability is actually around 95. Indeed, while the industrys annualized rate of return on average surplus rose to 9.7 percent this year compared to 3.1 percent in first-half 2002–its highest level since 9.8 percent in first-half 1998–its still significantly below the 15 percent recorded for first-half 1987.
Still, while the knee-jerk tendency will be to expect a softening market as the cycle inevitably shifts gears, we still see the industry in an uphill struggle.
The market will continue to moderate from its ridiculous levels last year (in July 2002, the average commercial rate hike was 33 percent, according to MarketScout.com), to a more manageable renewal (16 percent this past August), but it wont go soft anytime soon. With some primary carriers adding billions to reserves, others pulling out of markets entirely, and reinsurers still missing in action, the best of times for buyers is not exactly around the corner.
However, refueled by rising premiums and investment gains, the worst of times may at last be behind us, for both buyers and sellers alike.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 3, 2003. Copyright 2003 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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