Groundhogs See Premium Growth Slowing
Insurance groundhogs popped their heads out last week long enough to indicate that while property-casualty prices should keep dropping in general this year, a softening market won't necessarily come at the expense of industry profitability.
Insurers could not have been happy to see the groundhogs surveyed by the New York-based Insurance Information Institute forecasting a continued decline in the rate of growth in net premiums written to an average prediction of 2.7 percent this year, down from the 4.3 percent growth estimated for 2004. Estimates for the year ahead ranged from a high of 4 percent by optimists at Lehman Brothers and Merrill Lynch to a low of 0.9 percent by the pessimists (or are they the realists?) at Standard & Poor's.
However, carriers chilled by predictions of a softening market might have been warmed up by the prospect of continued underwriting profitability, despite the moderation in p-c rates. Analysts peering into their crystal ball, on average, expect the industry's combined ratio to come in at 98.9just two-tenths of a point worse than the estimate for 2004, which is expected to be the first year since 1978 that the industry breaks the magic 100 barrier.
Estimates among the various groundhogs ranged from a high of 101.5 over at reinsurance broker Gill & Roeser, to a low of 96.1 from the bullish folks at Prudential Securities.
Robert P. Hartwig, senior vice president and chief economist at the Insurance Information Institute, pointed out that the premium growth prediction for 2005 is dramatically lower than the 9.8 percent average gain enjoyed during the hard market of 2003. Indeed, premium growth estimated at 4.3 percent for 2004, he noted, came in well below the most pessimistic analyst expectation the consensus was for 7.4 percent growth last year at this time, with the lowest individual estimate at 5.2 percent.
Mr. Hartwig said sharp weakening in the pricing environment over the past year "means that current gains are more directly related to increased exposure growth and higher demand associated with the current economic recovery."
However, he noted, the combined ratio of losses and expenses to premiums predicted for this year is still a "vast improvement over the terrorism-impacted 115.7 result in 2001."
Still, if the groundhogs' average prediction pans out, "the bottom line is that the industry will still be paying out almost exactly the same amount in claims and associated expenses as it earns in premiums, thereby increasing the importance of investment earnings," Mr. Hartwig added.
The big risk for the industry, Mr. Hartwig said, is that pricing and underwriting discipline might loosen, undermining premium growth and possibly sending the combined ratio soaring. While "pricing is clearly easing," he noted, it "cannot yet be characterized as destructive."
Other risk factors that could upset the groundhogs' predictions, he noted, would include the failure to pass litigation reform and allowing the Terrorism Risk Insurance Act to expire, along with the unknown "ultimate impact" of investigations of insurers and brokers by New York Attorney General Eliot Spitzer and other state agencies.
Whatever the outcome of the probes, however, "insurer and broker expenses are certain to rise in 2005and beyond as compliance costs increase as new regulations come online and fines and penalties are levied and paid."
Sidebar:
Flag: Recap
Head: How Did Groundhogs Do In 2004?
Just for fun, we took a look at the predictions of the groundhogs surveyed last year by the Insurance Information Institute.
As it turns out, the groundhogs came pretty close to the ultimate reality on combined ratio, on average predicting a 100.3 result very close to the 98.7 estimated for 2004, despite the impact of four major hurricanes last fall.
However, the groundhogs were way too optimistic on pricing trends on average predicting a gain in industry net written premiums of 7.4 percent, when the reality is turning out to be far more modest growth of 4.3 percent. This makes their proximity to the bull's eye on the combined ratio even more remarkable the industry actually outperformed the groundhogs' best guess despite far slower premium growth than they expected.
Reproduced from National Underwriter Edition, April 29, 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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