Rating Firm Says P-C Market Stable Despite Softening

Competitive forces in the property-casualty insurance market are already taking their toll, and the price cycle's downward movement has already begun, according to a new Standard & Poor's report.

Despite this trend, the ratings agency has posted a stable outlook for the sector for the rest of this year.

Commercial lines insurance prices this year have dropped more than 10 percent. Also, terms and conditions for some lines are loosening, and the industry is grappling with the urge to loosen underwriting standards, S&P reported.

Personal line companies, S&P said, are in a similar situation. According to the federal consumer price index, prices for tenants and household insurance fell 0.9 percent in 2006 and rose just 0.6 percent for motor vehicle insurance--far less than the year's 3.2 percent increase in overall consumer prices.

For the insurance industry as a whole, 2006's results were the highest in this decade, S&P noted.

According to the Insurance Services Office, U.S. property-casualty insurers' net income was $63.7 billion for 2006, a 44.3 percent increase from 2005's catastrophe-laden results. Few disasters in 2006 and strong price increases from prior years let the industry catch the perfect wave in 2006 and achieve record profits, said S&P.

The rating firm said its stable outlooks for all insurance sectors--property-casualty, life, managed care and reinsurance--reflect the strong profits achieved in 2006 and the softening markets they'll be facing in 2007 and 2008.

As of midyear 2007, reinsurance terms and conditions were already under pressure to loosen--a trend that's spreading to other sectors. Prices, too, are softening across the board, and some life insurers are still planning to come to market before year-end with aggressively underwritten product features, according to S&P's study.

Early results indicate that barring a natural disaster, another good year is foreseen for 2007, the firm said. To keep earnings steady, insurance companies will need to keep demonstrating strong underwriting and pricing discipline, S&P advised.

Although 2006 may be a peak year for industry performance, 2007 still looks attractive for the p-c sector. "We expect many companies to offset margin deterioration by releasing more of the reserves on their books for business written in prior years, particularly for the 2003-2006 period," the report said.

However, property insurers are now entering what could be a very active windstorm season. The onslaught of decreasing rates will start to become more noticeable for the property-casualty industry as a whole over the next six quarters, S&P said.