The property-casualty industry looks to be heading for a profitable year, but (no pun intended) storm clouds are on the horizon. The latest prediction comes from Conning and Co, the Hartford, Conn. based insurance research firm.
According to Conning’s analysis, 2006 looks very strong, with past price hikes fattening bottom lines. The bad news is the industry can’t ever seem to maintain pricing discipline, which is (inevitably) leading to price competition in some lines, which in turn will result in rising loss costs and a decline in return on equity (which isn’t all that strong to start with at 9.2% in 2005).
So far, prices have remained flat to slightly down, with mild variations among the various insurance lines (work comp prices are slightly lower, property (outside of hurricane areas) flat, D&O down somewhat…)
The big worry continues to be the storm season, which has been quite mild to date. One knowledgeable source, a reinsurance broker, told me the reinsurers are holding their collective breath while watching the Weather Channel. if the weather continues its’ current quiescent state, reinsurers may well recover a big chunk of the losses they incurred over the last couple of years. If not, expect to see reinsurance premiums zoom up for all property and casualty lines, as reinsurers seek to maintain solvency.
What does this mean for you?
Primary insurer profitability follows reinsurer profitability, hope for calm winds.

While primary P&C insurance markets appear to be flat to softening, the opposite seems to be occuring in the reinsurance business. According to leaders of several of the top reinsurers, capacity is down while demand is up, the indication of a hardening reinsurance market.
Underlying these macro trends are less obvious factors contributing to this apparent dichotomy. First, the secondary insurers are paying more attention to bottom lines than top lines; looking for profitable business and not just any business. Second, reinsurers are seeking good long-tail line business such as workers comp; these lines also tend to be the least affected by natural catastrophes and provide the longest access to capital as claims are paid out over years instead of months. Third, with interest rates ticking up, reinsurers can find attractive places to invest premiums over the long haul.
And finally, there are a lot of very anxious reinsurance underwriters who break out in a cold sweat when the barometer drops…witness all the press about the season’s first tropical depression, a weather non-event that normally would merit nothing more than a slightly extended local weather update in coastal Florida cities.

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.

The national conference of insurance agents’ annual legislative get together featured a panel comprised of CEOs and top execs at some of the nation’s leading property and casualty insurers.
The gentlemen discussed terrorism reinsurance and the need for a federal backstop, contingent commissions, state reinsuramce pools, and state v federal regulation. All interesting topics, but I’m most worried about something that doesn’t seem to have hit their radar.
Health care costs.
Yes, these guys are P&C insurers – they insure buildings, liability, the environment, cars, houses, businesses, boats and many other things. No, none of them are health plans per se. But they all are facing double-digit increases in the medical expense portion of their claims dollar, have been for years, and don’t seem to be paying attention.
In workers comp, over half of the claims dollar goes to medical care; for the largest insurers that’s about $1.5 billion annually. Auto insurers also pay a lot of medical expenses, as do medical malpractice carriers and liability insurers.
Yet the top execs don’t appear to give medical inflation and health care costs the same attention they give to TRIA, reinsurance pools, or state v. federal regulation.
Maybe that’s why their health care costs are going up so fast.

Following on the heels of the “revelation” that the Property and Casualty insurance industry experienced a significant drop in profitablility last year comes news that insurance rates appear to be leveling off from last falls’ declines. According to an analysis done by Lehman Brothers, the average commercial account saw a drop of 2.7% over their prior rates.
Yes, rates are still dropping – a little. The exception is property insurance, where rates are bumping up significantly, with the greatest increases in catastrophic coverage hitting the 25% range.

Weiss Ratings has released its analysis of the P&C industry’s 2005 results; it will come as no surprise that results are down due to hurricanes and related disasters.
For those unfamiliar with the industry’s risk structure, here’s a quick snapshot. Primary insurers, such as Allstate and USAA, sell the policies and usually reinsure some portion of the potential losses with another insurance company. Thus, when big claims, or lots of claims, hit, the reinsurers get hammered.
Such was the case in 2005. Although the number and size of claims were high, reinsurers picked up a big chunk of the losses.
And, insurance companies did a pretty good job of investing premiums and therefore gained substantial returns on those assets. As a result, despite underwriting losses of $4.2 billion, on the whole the industry earned $46.7 billion, up 13% from the prior year.
The entire industry has just over half a trillion dollars in surplus available to pay claims. So, even if a major disaster hits, we should be OK.
What does this mean for you?
With reinsurance rates going up and coverage harder to obtain, expect to see the market continue to waver between hard and soft as underwriters wait for the hurricane season.

The rumors of a potential St. Paul/Travelers merger with Zurich are likely groundless. Sources indicate that reports of a pending deal in the Wall Street Journal between the two insurers are incorrect.
According to a high-level exec at one of the companies, “there are no discussions at any level for either a merger with ZFS or an acquisition of the North American P&C operation.”
That said, St. Paul/Travelers is in the acquisition mode, and will likely buy something this year.

Marsh Mclennan, the nation’s largest broker, has once again been hit by a civil suit charging bid rigging, hidden commissions, and RICO violations. This time the suit has been filed in Florida’s Lee County.
According to the St. Petersburg Times, one of the issues deals with hidden commission payments from insurers:
“The suit does allege Marsh contracted with Miami-Dade County to provide coverage for services for a flat fee, but received from insurers an additional $140,000 in hidden commissions.”
Marsh has condemned the suit, noting it simply repeats the charges filed by (and not coincidentally settled for $850 million by) NY Attorney General Eliot Spitzer.
Thanks to Helen Knight for the tip.