A Soft Landing

This soft market is likely to linger into the New Year.

Analysts Forecast Healthy Q3 Reports from Insurers” promised the headline on Insurance Journal‘s Web site, www.insurancejournal.com, on Oct.22. Reuters reported that third-quarter earnings reports from insurers would look a lot better than they did a year ago. A recovering stock market and only minor catastrophe losses would mean profits – even with premiums continuing to decline and the economy far from recovered.

“We should see significantly improved results,” said Bob Hartwig, president of the Insurance Information Institute, a New York-based industry group. “The improvement in investment environment and reduction in catastrophe losses are a welcome turn of events.”

For sure, 2008 was a difficult year. Remember Hurricanes Ike, Gustav and Dolly? Ike alone created $12.5 billion in insured losses, and not just on the Texas coast. The storm tracked up into the Midwest, creating havoc and unforeseen losses there, too. Insured losses attributed to Ike in Ohio alone were nearly $1.2 billion. In addition to the strain from those major storms, insurers lost billions in stock market turmoil in 2008.

The good news for insurers was that early third quarter reports were as predicted.

Travelers Companies Inc., the No. 1 publicly-traded U.S. property/ casualty insurer, said its quarterly profit more than quadrupled. Travelers managed a $524 million underwriting gain for the quarter. In the year-earlier quarter, the company posted a $288 million loss thanks to Dolly, Ike and Gustav.

The Chubb Corp. also fared well in the third quarter. It reported net income of $596 million compared to $264 in the third quarter of 2008. Chubb’s third quarter combined ratio was 85.4 in 2009, compared to 98.1 in 2008. Catastrophe losses in the third quarter accounted for only 0.8 percentage points of the combined ratio, compared to 13.6 points in the third quarter of 2008, which included the hurricanes.

While insurance companies may be managing well in difficult economic times, they have not been able to raise premiums. The bad news for insurers (good news for consumers) is that this soft market is likely to linger into the New Year.

A new Advisen Ltd. briefing said that the damaged economy will keep rates from rising while at the same time sales, payroll and other measures of exposure used to calculate premiums may fall further. Average premiums have been falling steadily since 2004 in some lines of insurance. The average general liability premium is now at 2000 level, according to Advisen. The average workers’ compensation premium is close behind.

Certain narrow market segments such as financial institution directors and officers (D&O) liability have seen premiums rise, but most of the commercial insurance marketplace remains soft. Rate levels in lines such as general liability and commercial D&O may erode further.

Dave Bradford, an Advisen executive vice president, said meaningful rate increases may not happen until at least 2011. This may be “a boon for insurance buyers, but a painful and potentially damaging situation for some insurers and, especially, brokers,” he said.