Editor's Note: This article originally appeared in National Underwriter, P&C.
On the heels of Fitch Ratings' negative analysis of the insurance industry's near-term future, an analyst with Celent said he is even more pessimistic about the industry than Fitch.
In an interview with National Underwriter, Mike Fitzgerald, senior analyst with Celent, a Boston-based financial research and consulting firm, said he is more negative when it comes to rating the P&C insurance industry, saying that the issue with this soft market cycle is "too much capacity. That's the problem."
In a statement, Mr. Fitzgerald said, "The negative rating outlook issued by Fitch Ratings [Wednesday] for U.S. property and casualty is warranted and, in addition to the pricing and demand concerns mentioned in the press release, there are loss and expense pressures which should dampen expectations."
He continued, "On the loss side, the earned premium flowing through results in 2010 will reflect the full effect of the economic downturn and the lower premiums gained throughout 2009. Even given 'normal' loss levels, this earned effect will increase the loss portion of the combined ratio."
Fitch projected that for this year, the P&C insurance industry would run a combined ratio of 101 and predicted for 2010 a combined ratio of 104.
Hardening will come after a long soft cycle, Mr. Fitzgerald said, as companies find single-digit returns no longer acceptable. Without a major catastrophe, he explained, there will not be a near-term change in insurance market rates.
It will take an "act of enlightenment" before insurers end "the long, hard slog of the soft market playing out" today, he told NU.
"On the expense side, written premiums will increase in line with a general economic improvement but will not recover to the level needed to spread the largely fixed expenses facing insurers in 2010," he said in his statement. "Most expenses will be fixed because the downsizing actions available to most insurers in 2010 will be limited (since most actions will have already been taken), so 'shrinking to greatness' will not be an option."
Insurers will also need a pick-up in demand for insurance that has been depressed due to the economic crisis, he told NU. The industry will lag behind the rest of the economy, he suggested, and such a pick-up, which would reduce capacity, will not take hold until 2011.
He noted that another driver, reinsurance, has so far not had an impact on the insurance market because carriers are absorbing the cost of increased rates in order to avoid the loss of markets.
Insurers have practically wrung-out all they can on the expense side, said Mr. Fitzgerald, and if they cut further they risk jeopardizing service and not being in a position to respond when the opportunity comes to grow.
Mr. Fitzgerald said that if a market change does begin it would not start until after the first half of 2010 and may become more entrenched by the beginning of 2011.
Mark E. Ruquet is an associate editor at National Underwriter, part of Summit Business Media's P&C Magazine Group, which includes Claims.
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