Claims costs for 2005 will outpace premium growth

Despite the strong results posted by the U.S. property and casualty insurance industry in 2004, this year will likely see loss costs significantly outpace premium growth, according to a special report by A.M. Best.

The rating agency says the US$6.3 billion underwriting profit achieved by insurers – the first since 1978 – is the result of rate increases leading up to the pricing peak in 2003. However, the “paltry” 4.7% premium growth achieved over 2004 (compared to the industry’s 14.7% year-on-year growth for 2002 and the 9.5% growth made for 2003) will likely be followed by even weaker gains for 2005 as a result of increasing price competition, the rating agency predicts. A.M. Best therefore expects premium growth of around 1.2% for 2005. “Accordingly, growth in loss costs is expected to rapidly outpace stagnating [growth] rates, and underwriting discipline will be the key to maintaining underwriting profit,” a report issued by the rating agency notes.

Renewed industry competition has been most obvious in the reinsurance sector and within commercial lines on the primary company level, the report notes. Personal lines pricing has, however, generally remained stable over the period. Despite the dark clouds on the horizon, the industry’s 2005 results will likely remain strong overall, and insurers should post a combined ratio of around 97.9% – which is consistent with 2004’s result, the rating agency says. “…the generally adequate pricing, prudent underwriting practices and operational efficiencies inherent in the unearned premium reserve at year-end 2004 will continue to benefit underwriting results in 2005, as this premium is earned and losses incurred are held at bay by stringent terms and conditions.” n