Just one impact of the continuing financial crisis on the property/casualty insurance industry is that the financial cushion that protects policyholders is declining. The p/c industryÃ¢â‚¬â„¢s third quarter 2008 results released yesterday by ISO and the Property Casualty Insurers Association of America (PCI) indicate that the downward trend in industry policyholder surplus continues. As the industry reported its second lowest annualized nine-month rate of return since the start of ISOÃ¢â‚¬â„¢s quarterly data in 1986 (1.1 percent, down from 13.1 percent in the first nine months of 2007), its policyholder surplus (insurersÃ¢â‚¬â„¢ net worth) dropped $39.4 billion to $478.5 billion at September 30, 2008 from $517.9 billion at year-end 2007.
In his commentary on the results, I.I.I. president Dr. Robert Hartwig notes the decline is the fourth consecutive quarterly drop in policyholder surplus, which peaked a year earlier at $521.8 billion during the third quarter of 2007. Following on the heels of five years of surplus increases (2003-2007), the return to negative capital accumulation is attributable to several factors, the largest and most obvious being declining prices for financial assets. Dr Hartwig explains that the diminution of capital, combined with reduced investment earnings, implies that insurers will need to be very disciplined in their underwriting if they hope to earn risk appropriate rates of return. This, he suggests, involves a return to the way p/c insurers were managed for decades before the era of high interest began in the mid-1970s. In other words: insurers managed their operations with the intent of earning underwriting profits every year and investment earnings were considered helpful, but were certainly not viewed as a reliable source of significant earnings.Ã‚ Ã‚ Ã‚ Ã‚