Anticipation key to success in 2005: A.M. Best

The p&c insurance industry must be on its toes in the coming year, prepared for a threat from any corner as it comes off of one of its biggest roller-coaster rides in 2004. This, according to the annual review/preview by A.M. Best.The rater notes hazards have taken a number of forms in the past few years: terrorism; four major Atlantic hurricanes striking Florida in one year; the investigation into industry practices by New York Attorney General Eliot Spitzer; skyrocketing tort costs and widespread shareholder lawsuits based on accounting irregularities.For 2005, several trends on the horizon point to the need for insurers to anticipate and react quickly to changing times. Among these is the anticipated downturn in the pricing cycle. A.M. Best notes, “with capacity restored, pricing declines accelerating, and terms and conditions relaxing, a strong focus on rate adequacy and underwriting controls, as well as the diligent use of sophisticated price-monitoring tools will drive responsible competition.”However, if the past is a guide, some companies who do not have a handle on underwriting and reserving will drive competition to “irrational” levels. “Unfortunately, it takes years for the pitfalls of inadequate pricing to manifest themselves in results and for those players to exit the market,” the rating agency notes.Companies who want to maintain discipline must have the flexibility, talented people and technology to determine and walk away from under-priced business. This will be all the more important given declining bond portfolio values, A.M. Best. And the industry should not depend on tort reform or the extension of the Terrorism Risk Insurance Act (TRIA) in 2005, but continue to price based on “the current state of affairs”.Also, in 2005, insurers will be looking at greater transparency in response to investigations of broker compensation and other industry practices. Catastrophe planning will be highlighted in the wake of 2004’s unprecedented natural disaster losses. And mergers and acquisitions could increase as top-line growth stalls, although sellers are still likely to outnumber buyers, the rater says.