ItÃ¢â‚¬â„¢s that time of year again. The Insurance Information InstituteÃ¢â‚¬â„¢s Earlybird Forecast 2008 is out, revealing the prospects for the industry in the year ahead according to a panel of Wall Street stock analysts and industry professionals. I.I.I. president Dr Robert Hartwig notes that this yearÃ¢â‚¬â„¢s results Ã¢â‚¬“ with the apparent paradox of strong profits but stagnant premium growth Ã¢â‚¬“ are a reminder of the highly cyclical nature of the property/casualty business. Looking ahead, Dr Hartwig also points to looming challenges for the industry in 2008. Catastrophic loss and the potential loss of pricing and underwriting discipline are among the chief concerns. Resurgence in bad faith litigation in auto, home and medical malpractice claims and state referenda that potentially raise damage awards are other causes of concern. Regulatory and legislative risks also loom large in 2008.Ã‚
The P/C industryÃ¢â‚¬â„¢s profits may still be reasonably strong, but industry margins are virtually guaranteed to fall well short of those realized by the Fortune 500 group of companies which is expected to turn in an average return on equity in the 14 to 15 percent range this year. ThatÃ¢â‚¬â„¢s the view of I.I.I. president Dr. Robert Hartwig in his commentary on the industryÃ¢â‚¬â„¢s first-half 2007 financial results. A decline in overall profitability due to a marginal deterioration in underwriting performance are the low notes of what was otherwise a strong first half performance that bodes well for the rest of the year. The headline numbers: the industryÃ¢â‚¬â„¢s annualized statutory rate of return on average surplus declined to 13.1 percent during the first half of 2007, down from 13.5 percent in last yearÃ¢â‚¬â„¢s first half; the industryÃ¢â‚¬â„¢s combined ratio deteriorated slightly to 92.7, compared with 92.0 during the first half of 2006. Point of interest: ISO estimates that the combined ratio would have had to improve to 91.5 percent in order for insurers to have earned the 13.9 percent long-term average rate of return for the Fortune 500. Nevertheless, the industry is on track to record what could be its seventh best combined ratio since 1920. But, intensifying competition is taking its toll on insurers with premium growth at just 0.1 percent in the first half of 2007. If maintained through the rest of the year, this would represent the lowest growth rate for the industry during the past 40 years. Check out Dr. HartwigÃ¢â‚¬â„¢s full commentary at http://www.iii.org/media/industry/financials/2007firsthalf/Ã‚
It strikes us that the property/casualty industry canÃ¢â‚¬â„¢t win when it comes to reporting its financial results. If profitable, insurers are always accused of being greedy at consumersÃ¢â‚¬â„¢ expense. But what is the alternative? Take the first-quarter 2007 results just released by the industry. The industryÃ¢â‚¬â„¢s net income after taxes dipped to $15.8 billion in Q1 2007 from $16.7 billion in Q1 2006, and its rate of return fell to 12.9 percent from 15.5 percent. The decline in profitability occurred despite the fact that the industry turned in one of its best underwriting performances ever, with a combined ratio of 91.7, down from 92.4 at full-year 2006. As I.I.I. president and chief economist Dr. Robert Hartwig noted in his commentary, the financial performance of the P/C industry during the first quarter was generally excellent, but it also provided confirmation that the industry is now past its cyclical peak in profitability of 14.0 percent achieved in 2006. Ã¢â‚¬Å“The only question that now remains is how long the decline in profitability will last and how many years it will take to get to the bottom,Ã¢â‚¬ said Dr. Hartwig. Whether or not you agree with this depiction, the fact remains that insurers cannot meet their objectives unless they are financially successful. Another key challenge facing insurers (unlike other industries) is that the largest portion of their expenses involves losses that are difficult to predict. Check out Dr. HartwigÃ¢â‚¬â„¢s full commentary at http://www.iii.org/media/industry/financials/2007firstquarter/.Ã‚
Late last week NCCI Holdings released its annual “State of the Line” workers compensation market analysis showing that the 2006 calendar year combined ratio was 96.5 percent, the best underwriting result in at least 30 years and the first underwriting profit for the line since 1995. Although the underwriting results are the best in decades, NCCI did flag some critical issues that continue to face the sector in the long-term. Among them, skyrocketing medical costs, low investment returns, a changing political landscape and the projection that the underwriting cycle is likely at its peak. On a day in which illnesses suffered by Ground Zero workers have again made the headlines, weÃ¢â‚¬â„¢d like to flag another emerging issue — the latent illnesses and disease among first responders to the September 11, 2001 terrorist attack. New York City officials estimate the treatment costs for those suffering respiratory illnesses is already in the hundreds of millions of dollars and that other illnesses such as cancer may eventually be linked to the disaster. For more information on workers compensation check out I.I.I.’s update.
That commercial insurance premiums continued their decline in the first quarter of 2007 is only part of the story of the RIMS Benchmark Survey. But letÃ¢â‚¬â„¢s take a look at theÃ‚ highlights: Directors and Officers (D&O), down by 7.7 percent in Q1 2007 and by more than 12 percent in the last two quarters of 2006 combined; workersÃ¢â‚¬â„¢ compensation down by 3.8 percent in Q1 2007; and general liability down by just 0.8 percent in the fourth quarter of 2006. Once again commercial property was the only line to report an increase in Q1 2007. No surprise there, but consider that rates in this line reflected a marginal increase of just 0.8 percent, compared with a spike of 6.6 percent in the fourth quarter of 2006. While there is no doubt that companies with properties in catastrophe-exposed regions are still seeing premiums rise, perhaps the underlying story is that even risk managers with coastal property exposures are seeing some relief ahead ofÃ‚ the 2007 hurricane season. For more perspective on pricing and overall industry trends, check out I.I.I. president and chief economist Dr. Robert HartwigÃ¢â‚¬â„¢s latest Overview and Outlook for the P/C Insurance Industry.Ã‚ Ã‚
Today, as expected, saw the property/casualty industry report record financial results for 2006. Here are the headline stats: the industry turned in its best underwriting performance since 1949, with a combined ratio of 92.4; profits (net income after taxes) increased by $19.5 billion, or 44.3 percent, to $63.7 billion from $44.2 billion in 2005; the industryÃ¢â‚¬â„¢s rate of return on average surplus rose to 14.0 percent in 2006, up from 10.8 percent in 2005 and the best result since 1987. While applauding what is generally an excellent set of results, itÃ¢â‚¬â„¢s important to look atÃ‚ our industryÃ¢â‚¬â„¢s financial performance in 2006 in a broader context. As Dr. Robert Hartwig, I.I.I.Ã¢â‚¬â„¢s president and chief economist, notes in his analysisÃ‚ the sharp decline in catastrophe losses from $61.9 billion in 2005 to $9.2 billion last year is too often cited as the primary reason for the surge in profits. Other key factors played a role and the industryÃ¢â‚¬â„¢s extraordinary performance during 2006 is unlikely to be repeated for decades.Ã‚ Ã‚
For those of us lucky enough to have seen snow this winter (i.e. Denver) the news that Punxsutawney Phil did not see his shadow and that there will be an early spring in 2007Ã‚ will be gladly received. For the industry, however, the freeze looks likely to last a little longer. According to the I.I.I. 2007 Groundhog Day forecast, most insurance industry analysts predict slower P/C premium growth in 2007. Nevertheless, this yearÃ¢â‚¬â„¢s survey results indicate that the respite in catastrophe losses in 2006 will likely propel the industry to its best underwriting performance since 1936. Industry profitability is expected to continue in 2007, albeit with an underwriting performance that generates a much smaller underwriting profit. This apparent paradoxÃ¢â‚¬”a peak in industry profits, but stalling premium growthÃ¢â‚¬”is a clear reminder of the cyclical nature of the property/casualty business, and the fact that our industryÃ¢â‚¬â„¢s financial fortunes are influenced by a number of factors.Ã‚ Ã‚