US insurer profitability continues slide: ISO

The US p&c industry will continue to see a downward trend in profitability despite rate increases, predicts the US Insurance Services Office (ISO). The ISO is projecting a combined ratio of 102.9% for 2003, and about 101% for 2004, but with growth falling to 9.2% this year and 6.1% in 2004.
Speaking at the Society of Insurance Research’s annual meeting, ISO president & CEO Frank Coyne says that should the industry give into competitive forces and slide into soft market pricing, it could easily sink back into a prolonged period of profit concerns.
“In the first three years of this decade, the industry’s rate of return [on surplus] has averaged just 2.8%,” Coyne says of the industry’s precarious financial position. This compares with an average annual return on surplus of 13.7% through the 1970s, 10.3% in the 1980s, and 8.7% in the 1990s.
“Consider that with a first-half 2003 combined ratio of 99.8%, the industry’s annualized rate of return was 9.7% – well short of the 15% rate of return on equity investors look for,” he adds. “To achieve a 15% rate of return with today’s leverage, investment results and tax rates, the industry would have to post a combined ratio in the neighborhood of 94.4% – something it has never achieved on an annual basis.” This compares with 1987, the last year the industry achieved a 15% rate of return, when the combined ratio was 104.1%. “The message should be clear,” says Coyne. “What used to be good enough is not good enough anymore.”
Coyne is concerned by signals the hard market may be abating, including ISO data showing commercial rate increases peaked in July 2002 and have been dropping since. He also pointed to the Council of Insurance Agents and Brokers survey for third-quarter 2003 showing commercial market flattening in many segments, and even some rate decreases.
“Insurers have paid dearly for failing to adhere to disciplined underwriting and cost-based pricing,” says Coyne. This includes the exodus of commercial clients to the alternative market and the increase in insurer insolvencies. Today, about half of the commercial market is in alternative mechanisms, and last year, 38 US insurers went belly-up.
Coyne hopes insurers have learned a lesson from these events. “Sustainable profitability can only be achieved through sound risk assessment cost-based pricing, solid underwriting and strong loss adjudication not slavish devoting to growth and nave reliance on investment gain from fickle financial markets.”