One Giddy Groundhog

There is no truth to the rumor that I was approached about doing a remake of the movie “Groundhog Day,” only with an insurance theme this time–the tragic tale of a poor business journalist (yours truly) doomed to spend the rest of eternity watching the industry fall victim to the same hard market/soft market cycle time and time again.

While analysts queried by the Insurance Information Institute for its annual “Groundhog Day” forecast warn of a softening market for as far as the eye can see, we may very well be witnessing the birth of a new era in the property-casualty industry–the profitable downcycle!

Yes, I realize our industry groundhogs, on average, expect sluggish premium growth of just 1.8 percent this year–the third-slowest growth rate since 1998, and nearly half the already anemic gains anticipated when all the numbers are added up for 2006. And although it's way to early to do anything but guess, those queried warn of a soft market right through 2008, with premiums next year rising just 1.9 percent.

It's actually worse than it looks–from a pricing perspective–because these average premium gains are skewed by the fact that carriers are charging an arm and a leg for property insurance in catastrophe-prone areas. Indeed, discard the black cat in the business, and rates are actually falling substantially in most lines.

But the reason I don't feel like Bill Murray in “Groundhog Day” is that I am not witnessing history repeat itself over and over again. In fact, I've never seen a market quite like this one.

That's because despite the softening market, profits are not in free fall. The groundhogs are positively bullish about the bottom line, predicting an average combined ratio of 96.6 this year and 98.6 in 2008, despite the flat premium growth. Given the fact that the industry almost never posts results below the magic 100 mark, these are boom times, indeed!

This means underwriters are doing their jobs. As are risk managers in keeping the frequency and severity of losses under control. As are state and federal lawmakers in passing reforms–to limit class-action suits and workers' comp costs, for example–that have cut claims and allowed insures to lower rates without risking their solvency.

Despite back-to-back years of record hurricane losses, the industry is still producing impressive profits. That can't last forever, but given the better technology in place to assess exposures on an individual and overall basis, carriers are in much better position to manage markets profitablity. That is to the advantage of policyholders and carriers alike.

Will these good times last, or will insurers fall back into bad habits? A lot depends on the investment markets. Wall Street is still doing well, but the financial markets are not soaring to dizzying heights–certainly not rising fast enough to encourage insurers to fall back on cash-flow underwriting.

How about you? What's your assessment of the market? Is the foundation solid despite falling rates, or are insurers like those cartoon characters, confidently walking off a cliff and standing on thin air, until they realize there's nothing holding them up and they plummet to the distant ground below?