Hartwig Says Factors Soften Economy Downturn For Insurers

ORLANDO, Fla.--A leading insurance economist told an industry gathering here that the effects of the current economic downturn on underwriters will likely be subdued because of the nature of their business.

The impact on insurers "will most likely be muted," said Robert P. Hartwig, president of the Insurance Information Institute, in a speech to the National Council on Compensation Insurance at the group's annual seminar here yesterday. However, he warned that profitability is headed downward.

Mr. Hartwig, in a presentation crammed with statistics and charts, discussing "2008: A Make or Break Year for the P/C Insurance Industry?" reminded his audience that the vast majority of their business is of the renewal variety and a large share is coverage that is required of purchasers such as workers' comp, auto liability, surety and homeowners.

Looking at the drop in interest rates that has accompanied the economic fall off, Mr. Hartwig said that historically such periods of low interest have seen the industry operate with its best underwriting performance.

Insurers have also done their best underwriting in the past during periods of poor equity market performance, he said, noting that when there is lower investment gain, carriers put greater emphasis on their underwriting.

Mr. Hartwig warned that there is another facet of a poor economy that can cause insurers problems--namely rapid inflation, which can quickly result in making carriers' rates inadequate.

Property-casualty profitability, Mr. Hartwig noted, is cyclical, volatile, vulnerable, and typically goes from peak to trough to peak over a period of 10 years. Industry profits reached their peak in 2006, he said, and he expects the sector to slide into a trough around 2010 or 2011.

According to Mr. Hartwig's figures, return on equity has been declining for insurers since its high in 2006. Personal lines, with an return on equity of 14 percent in 2006, are projected to fall to 6.3 percent this year, and commercial lines are projected to drop from 16.8 percent to 9.8 percent, he noted.

The I.I.I. president listed a variety of factors having an influence on how long the peak-to-trough cycle might take. The fact that insurers' surplus growth has left the industry with billions will lead to price competition and liberalization of terms and conditions, he projected.

Reserves that were used to boost net income will diminish in 2008 and the years ahead. Also, equity market declines and potentially a drop in bond prices could reduce policyholder surplus.

Mr. Hartwig advised that the disclosure requirements of company finances under the Sarbanes-Oxley Act should lead to better management of insurers' finances. He also mentioned rating agencies' increased focus on cycle management, which leads them to question company leadership on how they plan to handle down cycles and to react more quickly with rating changes.

He noted that finite insurance, which came under scrutiny for accounting abuses but had a smoothing effect on earnings, is now gone. A factor helpful to insurers, Mr. Hartwig pointed out, is their access to better technology than they had in past years, which is allowing faster adjustment to price, underwriting and changing market conditions.

In Mr. Hartwig's opinion, analysts and investors are now less fixated on growth and ready to support disciplined underwriting. In addition, the possibility of more merger activity will lead to greater discipline, he said.