Slow premium growth but underwriting profit still predicted for 2005: III

U.S. analysts are predicting property & casualty insurers will post a combined ratio of 98.9% in 2005, despite a slow down in premium growth, according to results of the Insurance Information Institute’s annual “Groundhog forecast”.
Analysts from various investment and research firms say the industry’s combined ratio should be on par with the 98.7% expected for 2004 yearend, although last year’s ratio was heavily impacted by hurricane losses. The III notes that without these storm losses the 2004 combined ratio could have been around 95%. The range of combined ratio predictions for 2005 runs from 96.1% from Prudential Securities, up to a still reasonably respectable 101.5% from Gil & Roeser.
However, premium growth is expected to drop off from the 4.3% estimated for 2004 to just 2.7% in 2005. In fact, the U.S. Insurance Services Office is predicting premiums growth of just 1.1% this year, while rating agency Standard & Poor’s is even more pessimistic at 0.9%. However, as III chief economist notes, 2004 actual premium growth came in below even the most pessimistic predictions in last year’s forecast. 2004 did see exposure growth coming from the commercial lines side, with business investment and hiring “finally beginning to perk up”.
In light of stalled premium growth, insurers would need to see increasing investment returns to boost profitability. However, as Hartwig notes, “given the current low yield, high volatility investment environment, it is clear that Fortune 500-level returns on equity in the neighborhood of 13% to 14% cannot be generated without a significant contribution from underwriting.”
Analysts rate the potential loss of underwriting discipline as the top concern for 2005, but Hartwig notes thus far pricing has not fallen to destructive levels.
Insurers will also face a variety of external threats in 2005, including uncertainty over the passage of tort reform and the Terrorism Risk Insurance Act (TRIA) extension, as well as the continuation of investigations into industry practices spurred by New York Attorney General Eliot Spitzer. At the very least, Hartwig notes, insurers can expect to see rising compliance costs on the horizon.