Recession Putting Insurers On Proper Path

Orlando

Property-casualty insurers will emerge from the recession with distaste for equity investments and a renewed focus on underwriting, the industry's leading economist predicts.

“Insurers will have to return to their underwriting roots,” declared Robert P. Hartwig, president of the Insurance Information Institute, during a speech to the Annual Issues Symposium of the National Council on Compensation Insurance.

As to whether the recession is ending, he assured his audience that the answer to that question is “unequivocally, yes.”

However, in his talk on trends, challenges and opportunities for property-casualty insurers, he cautioned listeners that they face “a very slow, sluggish recovery.”

Most importantly to workers' compensation carriers, he said, is the fact this will likely be a “jobless recovery” for some time to come.

Mr. Hartwig said that post-recovery, the p-c industry will have shrunk by about 3 percent in dollar terms and by 8 percent on an inflation-adjusted basis.

However, carriers will embrace the benefits of risk-based underwriting, pricing and low leveraging of operations, he added.

Mr. Hartwig added that the p-c industry will emerge with its risk management focus more intact, predicting carriers will get back to basics–including an aversion to stocks.

The chastened and “de-risked” p-c industry will face the same or even higher losses, and will have to work harder to match risk to price, he said.

Concerning regulation, he said the industry is in the waning months of an exclusive state-based system, suggesting there is a real possibility of a dual state-federal regulatory authority.

Once the “federal nose is under the tent, anything is possible,” Mr. Hartwig warned.

Among threats the industry faces, Mr. Hartwig said he foresees “regulatory overreach,” with creeping restrictions and efforts to halt credit scoring and predictive modeling. “Be prepared to wage battles for underwriting criteria,” he warned.

He said insurers could also expect efforts to address social and economic inequities through insurance, as well as “creeping socialization and partial nationalization of the insurance system.”

Mr. Hartwig–who was once the Institute's chief economist before assuming its presidency–also warned that a new wave of litigation could be expected with erosion of tort reforms.

Discussing profitability, Mr. Hartwig noted that it is not affected by the party affiliation of any president, pointing out that the industry's return on equity since 1950 has been 8 percent with Democrats and 7.89 percent under Republicans.

Looking at combined ratio results since 2001, Mr. Hartwig advised his audience that the workers' comp sector is the softest of all commercial lines.

Among trends that will impact comp insurers, he said, are worker health issues resulting from the obesity epidemic–with most obese workers filing twice as many claims as healthy-weight employees.

He also noted the effect of an aging work force, with fatal injury rates higher among the 65-plus group.

In addition, he reported that highway accidents are the leading cause of occupational death, with distracted driving likely to become more of a problem thanks to the proliferation of portable electronic gadgets.