February 4, 2003 by Canadian Underwriter
In a new survey by the U.S. Insurance Information Institute, Wall Street analysts predict that while the hard market will continue through 2003, its pace will slacken. Following up on its “Earlybird Forecast” late last year, the “Groundhog Forecast” suggests insurers are backing off of price increases too soon.
Analysts predict net premiums written will rise 12.7% in 2003, largely on the back of rate increases. This is off last year’s estimated pace of 14.2%, and the first sign of deceleration since 1998.
The industry’s combined ratio for 2003 is expected to drop further to 102.9% from 2002 yearend estimates of 106.1% and a sharp drop from 2001’s 115.7%. Despite the decline, the industry will still be paying out $1.03 for every premium dollar collected, and this with the assumption of no major catastrophes in the coming year.
The report warns insurers that continued rate hardening is needed to restore the industry to acceptable levels of return in the eyes of shareholders. “Lurking just below the surface is a far more disturbing and sobering picture one that suggests that if the current hard market ends anytime soon, it will end badly,” writes III senior vice president and chief economist Dr. Robert Hartwig. With a return on equity (ROE) of 4% predicted for 2002, and a combined ratio still above 2003 in the year ahead, the III notes that the industry is nowhere near achieving the 10-15% ROE shareholders desire. “In the current investment environment, combined ratios must fall below 95(%) before the industry’s financial performance achieves consistency with the risks it assumes.”
The report also seeks to dispel the myth of insurers as “price gougers”, noting that “full recovery is proving to be a slow and difficult process as insurers continue to be battered by unrestrained jury awards, surging asbestos claims, soaring medical inflation, high catastrophe losses, the crisis in corporate governance, loss of critical capacity, a weak investment environment and, of course, the extreme risk of terrorist attacks”.
The III says insurance remains more affordable than ten years prior, with commercial net written premiums at 1.5% of the gross domestic product in 2000, and estimated at 1.8% in 2002. This is well off 1998’s mark of 2.3% of GDP. And with the cost of risk relative to revenues falling by 42% between 1992 and 2000, commercial buyers are still getting a good deal, it seems. “Even with the increases of the past two years, businesses are still paying an estimated 13% less to manage risk than they were a decade ago.”