U.S. data threatens long-term growth

Imbalances in growth rates for property/casualty insurance premiums, losses and expenses could lead to a record downturn, says Frank J. Coyne, president and chief operating officer of Insurance Services Office Inc. (ISO). Forecasts based on third-quarter 1999 growth rates show the industry’s combined ratio would increase from 107.5% to 111.7% this year, and 136.2% for 2005. This would be almost 20 percentage points worse than 1984’s record ratio of 118%, Coyne points out. “In the 1970s, the industry made an underwriting profit in five years out of ten,” he says. “But in the two decades since the 1970s, the industry has not once posted an annual underwriting profit.”

The underlying trends are even worse than figures suggest, he says. “Since the mid-1990s, growth in reported losses has been depressed by declines in cat losses, and in environmental and asbestos losses on old business, as well as by deterioration in loss-reserve adequacy.” Adjusting the results to account for these factors, ISO found loss growth actually outpaced premium growth from 1995 to 1999. “Last year, reported losses and lost-adjustment expenses grew more than twice as fast as the 2% growth in earned premium for all lines.”

Investment income also declined the past two years, resulting in the industry’s GAAP return on net worth dropping to 6.8% last year, down from 8.5% in 1998. Despite the dire state of the market’s financial position, Coyne says he is confident the industry will ultimately weather the storm. However, he urges insurers to “consider costs” when pricing their products.