Hartwig: Underwriting Results Deteriorate, But Still Good

NEW YORK--While underwriting results have started to deteriorate, property-casualty insurers will still make about $28 billion in underwriting profits this year, the president of the Insurance Information Institute said.

Robert P. Hartwig, president of the New York-based I.I.I., shared the estimate with a group of over 100 area actuaries at a meeting of the Casualty Actuaries of Greater New York on Thursday.

The expected underwriting profit figure for 2007 is down from $31.7 billion in 2006, Mr. Hartwig said.

Underwriting results are deteriorating, he said, "but don't go away with the idea that they're bad," noting that the combined ratio for 2007 is expected to come in at about 93.5 and that the industry will likely still make an underwriting profit in 2008.

The consensus view of analysts being polled by I.I.I. is likely to be about 97.0 for next year, he said, adding that the results are still being tallied. This is "extraordinary" given the companion prediction that there will be "zero premium growth" in 2007 and 2008, Mr. Hartwig said.

"We have the first sustained underwriting profit in this industry in half a century," he said, referring to the fact that combined ratios will have remained below 100 for three full years if the 97.0 prediction holds.

"Nobody in this room was working in this industry the last time that happened" in the late 1940s, he said, noting that those prior periods of sustained profit also occurred in years when there were low interest rates.

Underwriting profits in the past few years benefited from loss reserve takedowns of $5.3 billion and $7 billion in 2006 and 2007, he said, at one point referring to the task of estimating reserves as being "at the heart of what actuaries do."

While the predicted underwriting profit for 2008 anticipates a similar level of reserve redundancy next year, the reserve well will soon be tapped out, he said. The question is when the fat in reserves will be depleted, said Mr. Hartwig.

"You can have infinite reserve inadequacy, but you're not going to have infinite reserve redundancy," he said.

Discussing the deteriorating underwriting results line-by-line for some major p-c insurance segments, Mr. Hartwig said while private passenger auto combined ratios improved from 108 in 2001 to 95.5 in 2006, "something in the underlying frequency and severity trends is not dropping as much as it once did," adding that prices are dropping also.

A long favorable drop in frequency is coming to an end, and severity is still rising for auto bodily damage claims, he said.

Mr. Hartwig also shared historical figures for homeowners, noting that the line was a "complete disaster" even without any natural disasters back in 2001, with a 122 combined ratio. By 2004 and 2005, even with the major hurricane losses that occurred in those years, the industry combined ratios were down to 94.4 and 100.3, he said, adding that these better results reflect the fact that a lot more of the business has been reinsured in recent years.

For 2007, the homeowners line is expected to come in at a 91 or 92 combined ratio, up from the 90.4 level reported in 2006, he said.

"This line has been nursed back to health because of the way insurers protect against large-scale losses," he said, noting insurers' utilization of reinsurance purchases as well as re-underwriting initiatives and the absence of major catastrophes in the last two years.