Conning Research: Insurers’ Financials Strong Despite Price Deterioration
The financial condition of the property/casualty industry is strong, and should be able to withstand the current price deterioration, according to a new industry study. “The outlook for the next three years – through 2010 – is generally soft for the property/casualty industry as a whole. We project continued deterioration in underwriting margins and implied return on equity,” said Clint Harris, analyst at Conning Research & Consulting. “However, the largest year-over-year increase in combined ratio is in 2008, and while this reflects a return to normal catastrophe losses, much of this deterioration is self-inflicted, as premium prices and premium rate adequacy continue to fall.”
The study, “Property-Casualty Forecast & Analysis,” identifies key drivers of the industry and forecasts industry growth and performance for 2007-2010.
While the study indicates a general soft P/C market, it also forecasts a slightly better 2009 and 2010 because analysts anticipate a modestly growing economy and a moderation of the insurance market. As combined ratios rise above 100 percent and operating ratios approach 90 percent, more individual insurer results will become unacceptable to managements and stakeholders, the analysts said.
“Looking beyond this year, our forecast contains a somewhat more optimistic view of 2009 and 2010 because we anticipate a modest rebound in the economy and also a moderating competitive environment,” said Stephan Christiansen, director of research at Conning.
Policyholder surplus continued to grow in 2007, although the rate of growth fell to about half of the 14.1 percent growth rate in 2006 over 2005, based on preliminary 2007 data, according to Conning.
Nevertheless, Conning Research predicts premiums will start increasing early next year. “We project a return to net premium rate increases beginning in some lines as early as 2009,” Christiansen added. “In fact, we are already beginning to observe some insurers taking corrective actions in their markets because of poor results.”
Forecast Drivers
The analysts noted that the two key drivers in the P/C industry are the economy and competition but added that the relative importance of these drivers varies by line of coverage.
“The economy takes center stage in suppressing homeowners growth and escalating mortgage and credit guarantee losses. Price competition is the key driver for workers’ compensation, general liability, and reinsurance premium growth,” according to the study. “Insurers’ recent expansions into new markets and products also generally pressure prices lower and increase expenses for product and market development. Insurer competition and the economy are combining in close to equal measure to drive commercial automobile premium growth negative.”
The study also notes that eroding premium rate adequacy, inflation in medical costs and vehicle and building repair costs continuously place upward pressure on loss ratios while the high cost of gasoline has become an insurance driver as well.
“In the near term, high prices can reduce over-the-road exposures and loss frequency for both personal and commercial automobile,” the study said, noting that sustained high prices in gas can ultimately cause major disruptions in commercial automobile markets thereby diminishing profit margins, leading to aging vehicles, poor maintenance and higher loss frequency.
Market Competition and the Economy
The Conning analysts report that while some in the industry have begun to see prices start to moderate, they are not yet ready to call a turn in the market.
“Personal automobile rate decrease filings have slowed into 2008. However, advertising that focuses on premium rate savings continues,” the study said.
The analysts said that one reason they expect competition to continue intensifying is that many insurers have broadened their geographic reach while also expanding their product offerings. The analysts also noted that many general insurers and reinsurers have expanded into specialty and excess and surplus markets as well.
The study adds that the current state of the U.S. economy continues to suppress premium exposure growth. “The reversal in growth of homeownership and increased foreclosures limit premium growth opportunities for insurers. The credit crunch and uncertainty in the economy also limit business investment and premium growth,” the study wrote.