Winners & Losers

The good thing of the current market driving the property and casualty insurance industry is that rates are still increasing while loss ratios are beginning to improve. Claim trends seem to have stabilized, and inflationary pressures have minimized.

Many of the problems that influenced the market over recent years have now been considered into premiums applying to most classes of business. And, provided there are no new loss exposures such as mold, or the industry’s “after-market” auto parts setback, and the many other general loss-making developments of the past few years, we should find the market becoming favorable over the next two years. However, class actions and bad faith claims continue to be an area to watch.

Interest rates should remain stable for several years and that will encourage insurers to concentrate on underwriting profit and avoid cashflow underwriting which does not work when investment income is low. The soft market will not return until companies improve their return on equity which is still a long way off of shareholder expectations. As a result, the opportunity exists for companies that have adequate capital and good track records to continue to grow and prosper during this time. As such, capital is available for those companies demonstrating that underwriting profit is achievable.

But, there are still areas within the business that have problems, and these factors will continue to place pressure on the bottom-line. Specifically, several provincial/state regulators have resisted rate increases in private passenger and homeowner lines. This has become a political issue since insurance commissioners are elected or appointed by the governor and they do not want to offend voters. In addition to the rate issue, it has become difficult to restrict coverage, such as in the case of mold exposures, which actually is really a maintenance issue, and not an insurable coverage. If policies cannot be limited then premiums must increase.

Fraud factor

Fraud is an increasing problem, especially in Ontario and New York. Any jurisdiction that increases automobile insurance no-fault benefits will see an increase in fraud. Florida has taken steps to control fraud and has also granted proper premium increases. As a result, the loss experience in this state has improved immensely and insurers are now returning to the marketplace after many departures over past years. The commissioners of New Jersey and Massachusetts could certainly learn from their counterparts in this regard. Sadly, however, they are still restricting rates and insurers continue to withdraw from the market.

Ontario is finally showing some interest in reviewing the automobile insurance product that has produced unsatisfactory results for several years. The benefits are too generous, and the legislation is so restrictive that insurers have difficulty in controlling fraud. Many paralegal groups and medical clinics have been set up with incompetent personnel specifically for the purpose of encouraging fraudulent claims. Advertisements appear in certain “targeted” newspapers attracting people who have been in an accident. Once contacted, the people are told they will receive money by allowing the firm to submit a claim. Accidents are also staged to allow the occupants to claim for injuries. The paralegal will have the person sign forms and then pay them a percentage of the amount expected to be recovered from the insurer. Special numbers are used with people manning the phones to confirm employment at companies with fictitious names.

These groups in Ontario are highly organized and are defrauding the insurance industry of hundreds of millions of dollars. Without changes to the current system premiums will increase by 10% to 20% each year. The problem is rapidly escalating.

Select markets

The most profitable areas of business at this time are in specialty programs. Companies writing non-standard automobile, motorcycles, trucking, surety and other classes where competition is limited, will prosper in this market. MGAs are having difficulty finding insurers and reinsurers interested in specialty programs. As a result, rates are increasing on business written through these sources since they must show they can produce good results by increasing premiums. MGAs will continue to find markets very limited for several years since many of the companies that specialized in this field are no longer in business.

The reinsurance market continues to be limited and rates are still increasing. Most reinsurers posted poor results in 2001, and the general outlook for 2002 is not much better. While insurers can turn around their results in an 18-24 month period with increased rates, the same exercise takes a reinsurance company several years to achieve. As such, the insurance industry must recover first, then followed by the reinsurers. The companies writing long-tail business will also be much slower in the recovery process.

Historically, companies appear to be most aggressive when rates are inadequate and then fail to respond quickly when premiums are on the rise. Part of the problem is that during competitive times the underwriting losses use up too much of capital and they are unable to take advantage of new opportunities. Capital is not usually available when results have been poor. The losses resulting from September 11 came at a time when the industry was already suffering from one of the worst years and the additional losses from the disaster made a bad situation worse. Reinsurers have been adversely affected more than insurers since many losses exceeded companies’ retentions, and reinsurers picked up the greater share of the losses that arose.

Looking ahead

There will be gradual improvement in the industry’s financial state over time, but the recovery process will not be quick. The new capital that entered the reinsurance market is supporting catastrophe lines and is not being deployed in the automobile insurance field or for quota-share areas. As a result, smaller insurers are not benefiting from the new capital, and this is keeping the market extremely tight in non-standard automobile lines, especially in the U.S. The current hard market will continue for several more years in personal lines as well as some commercial products. This is a time when aggressive companies will prosper while companies that fail to take advantage of current opportunities will stagnate. The results of 2002 will clearly show who the market leaders are in this industry.