ROE Outlook Bad For P-C, Says Ernst & Young

ROE Outlook Bad For P-C, Says Ernst & Young

NU Online News Service, Dec. 9, 3:10 p.m. EST?Industry price competition makes the profit outlook for the property-casualty insurance sector "pessimistic," a consulting firm said today.[@@]

The gloomy prediction was issued by Ernst & Young in their "State of the Financial Services Industry Report."

Regulatory problems from investigations are more risk to companies' reputations than their finances, and "pricing trends, rather than catastrophe exposure, are the reason why the return on equity outlook for p-c insurers is pessimistic," the firm said.

E&Y noted that rate increases for total commercial policies are now below 10 percent, and competition is driving them down further.

"Rate increases for the commercial property segment are now in negative territory, also foretelling lower ROEs. The hurricanes in Florida may decelerate the rate of decline, but that won't fundamentally alter the trend toward price reductions," the report said.

According to the report, it is "only a matter of time before the total commercial line breaks the zero barrier and follows commercial property into negative territory."

Prevalent price-cutting remains something that insurers haven't been able to avoid over the last century, E&Y said.

As personal lines of insurance rack up "robust" profits with combined ratios in the mid-80s, "some major carriers have now decided that this is a good time to expand market share by reducing prices," the report said.

It noted filings for reductions by State Farm, saying the big player's actions affect every other personal lines carrier.

E&Y said the industry's loss reserves look stronger than 2002-2003, but noted one study suggesting that a $50 billion reserve deficiency remains. Overall the report found reserves "better than they have been in a long time."

With respect to rating agency actions, the firm said it expects few downgrades and little upward movement because the agencies are unlikely to increase them as the pricing cycle worsens.

The firm said that the scrutiny of broker activity by regulators could cause a power shift in the market "that may enable more consolidation than we have seen in the past."