“Permanent shift” in underwriting culture needed: III

If insurers are to “salvage” results for the rest of this decade, it will require a permanent shift in the underwriting culture, says Robert Hartwig, chief economist for the Insurance Information Institute (III).Hartwig, commenting on 2004 yearend results for U.S. p&c insurers, says that the days when a “relatively lousy” combined ratio of 109.2% could still net a return on equity of 11.5% are gone, and the average ratio of 106.3% seen so far this decade is yielding an average return of just 5.3%.Investors have failed to reap the return on capital needed to maintain their commitment to the insurance industry, with the cost of capital being around 10% ROE. Hartwig notes that the highly risky investment of insurance producing a 5.3% return does not compare favorably to the 4.8% return on the essentially risk-free asset of a 10-year U.S. Treasury note.”Today, achieving the industry cost of capital of 10% requires a combined ratio of 98% or better,” he notes. “Assuming current investment conditions prevail for the remainder of the decade, the industry would need to produce an average combined ratio of about 94% through 2009 just to end the decade with an average ROE of 10% an impossible task.”Impossible because pricing is already weakening far faster than even analysts predicted. 2004 produced net written premium growth of 4.7%, less than half the 9.8% growth seen in 2003, and well off the 8.1% growth predicted by analysts for this year. Even the lowest of analyst estimates collected by the III in December 2003 forecast premium growth of 5.2%.And insurers continue to face regulatory and legislative pressure, despite the tenuous financial picture. “some regulators and industry critics inappropriately cite rising industry-wide capacity and profitability as a rationale for rate rollbacks, thwart proposed rate increases in high-risk zones like coastal Florida or derail ongoing tort reform efforts,” Hartwig points out. And, opponents of renewing the Terrorism Risk Insurance Act (TRIA) are using the increase in policyholder surplus since 2002 as an argument that insurers are in a financial position to accept the potentially unlimited liability associated with terrorism risk.