2006 will be a good year for insurer profitability, according to Robert Hartwig of the Insurance Information Institute. If the storm season is not unduly harsh and if insurers can maintain some pricing discipline. Those are mighty big “ifs”, and while the weather may be unpredictable, the propensity for underwritering discipline to waver is well documented.
There are two components to profits – premiums and claims. And while the claims picture is cloudy, the revenue picture is pretty clear. Premium increases have leveled off to half of one percent, the lowest rate since the nineties. And in spots there has been evidence of rate decreases as insurers try to hold onto profitable business. If the discipline holds, insurers may be OK. If not, we’ll have problems.
While insurer profits look good (up 12% over 2004), that is misleading as the industry’s return on equity remains below that enjoyed by other, less risky businesses. An RoE of 10.5% is not adequate for an industry that is subject to huge unpredictable losses; investors will find better returns from less-risky investments in many sectors.
As unattractive as 10.5% may be, it is much better than the industry’s average results for the last ten years of 7.7%.
What does this mean for you?
Hold on to your hat. Predictions are for the hurricane season to be a bad one, and if a big storm makes landfall in a populated and/or industrialized area, losses will be big and so will rate increases.
May
24
While premiums and claims are the two primary components of profitability, we shouldn’t forget or underestimate administrative costs and investment returns.