The laws of supply and demand are making their impact felt in the P&C insurance industry – there is just too much capital chasing too few risks. Industry watchers have been surprised by how quickly P&C insurance premiums are dropping. For the first time since 1943, total premiums actually dropped last year – a result of price cutting by insurers and a worsening economy.
Profits are not falling as fast as revenues, but there have been significant declines, with the latest numbers indicating the P&C industry’s 2007 after-tax profits dropped 5.8% from 2006 to 2007. The net impact of the decline in revenue and profit is a 2007 return on equity (actually policyholder surplus, the industry’s proxy for RoE) of 12.3%, compared to a Fortune 500 RoE of 13.9%.
Yet capital still loves the insurance industry. It is still generating a profit based solely on underwriting (not taking into account investment returns), a happy event all too rare in the P&C business. And many in the industry are talking about how this time will be different, because they have better information, are more disciplined, will underwrite better, and won’t repeat the mistakes of the late nineties. Just like they said last time.
What’s this all mean?
Over the short term, better pricing for insurance buyers, and better coverage terms as well.
Continued blood-letting in the TPA market, which is getting uglier by the minute as normally self-insured risks buy insurance for less than their TPA’s loss pick. (Tough time for CorVel to get into the TPA market…)
And a significant increase in the number of mergers. Cochran Caronia published an insightful study last year linking the M&A cycle to the insurance cycle (and presented same at last summer’s AMCOMP conference). In that report, they predicted a 10-15% price drop for P&C insurance this year – so far, that looks spot-on, adding credibility to their forecast. Cochran expects reinsurers to invest in MGAs and buy or merge with primary carriers.
Primary carriers will also acquire other insurers and/or buy up MGAs to “capture the incremental underwriting income.” Liberty Mutual’s purchase of Ohio Casualty a year ago, and HCC’s acquisition of Kendrick and Associates are but two examples.
When will this stop? If reinsurers get hit hard (think hurricanes), there is a man-made disaster, or the world-wide economy picks up steam quickly, things could turn. Until then, insurers will slowly bleed themselves until they can’t take it any more.
Then the market will start to rebuild itself, on the rubble of the insurers who were convinced that this time they would be smarter.
Apr
18
