OK, here’s a post for the workers comp folks, laden with industry acronyms and inside scoop.
I’m at the AmComp annual meeting; its in Chicago this year, ably hosted by Aon. There was a particularly interesting session yesterday on underwriting in a soft workers comp market, moderated by Kathy Muedder of Selective. Rob Purdy of AIG’s American Home, Karl Amidon of Aon’s reinsurance group, and Bob McFadden of Munich Re America were on the panel. Here’s the report.
The 92% calendar year loss ratio in 2006 was the best in 18 years, especially in light of the 87% accident year combined ratio.
That’s the good news (actually, really good news). According to AIG’s Purdy the present loss ratio is unsustainable as carriers will try to grow a very profitable line. But, absent a major catastrophe, there will be a couple more years of good profits. Predictions are for a “final” combined ratio of 92.4% in 06 96.6% in 07, and 98.6% in 08.
One of the factors militating against a precipitious drop in pricing is the industry’s return on equity (RoE), which is projected to decline, primarily due to low investment returns, to 13% in 07 and 11% in 08 after 15% in 2006. (If investment results are low, carriers have to ensure their cost of claims is as well, otherwise profits disappear.) (RoE is key because an RoE below 15% or so drives capital away from the industry; the RoE for most equity indices is at or above that level)
There has been a rather significant premium decline in WC due to rate reductions in NCCI states – specifically in Mass NY and CA.
Which brings us to the key question – will the industry maintain pricing discipline? According to Purdy, the industry appears to be more disciplined than in the past. Sarbanes Oxley is one of the key drivers. While it adds to expenses it also requires carriers to be more disciplined. Relatively new factors also include more emphasis on data mining which enables fast reaction to market trends.
Other panelists noted that
— rating agencies are quicker to downgrade which adds discipline, and
— reserves are improving and under control.
What does this mean for you?
Pressure on WC rates will likely continue, with solid risks able to obtain reduced premiums…but no fire sale is in the offing.
More on the conference later…
I bet that rates do not plummet thus driving down ROE to the single
digit level for some time. I credit three developments: Sarbanes
Oxley, which puts the breaks on truly stupid behavior by stock
companies (such as was seen in the soft market of the late 1990s);
better internal controls (I have felt for some time that weak
controls allow for discounting to go on under the radar in insurers
without top level awareness); and the sense that if a very major cat
occurs (terrorist, natural) you want to keep your capital strong even
if this particular line is not hit.
Good post, Joe – thanks!