P/C Insurers Less Profitable, But as Much or More Risky Than Non-Insurance Firms, Reports New ISO Study

NEW YORK, December 13, 1996 — Property/casualty insurance companies are less profitable but as much or more risky than firms in other industries, according to a new study.

The property/casualty industry's capacity to provide protection depends on its capital, and the capital of any business "ultimately depends on investors seeking the best balance between risk and return," the study by Insurance Services Office, Inc. (ISO) said.

The study measured risk as the variability in return on year-end net worth for the 20 largest insurers and the 20 largest firms in 30 non-property/casualty insurance industry groups, including the life/health industry.

The study found that from 1979 to 1993 the median rate of return for the 20 largest property/casualty insurers was 9.6 percent — 1.6 percent less than the average of the corresponding medians for the 20 largest firms in each of the non-insurance groups.

The study also found that insurance was riskier than most non-insurance industry groups, based on each of three measures of variability used to assess risk — total variability in a firm's rate of return, a variability adjusted for industry cycles and an ISO composite index that is the average of the first two.

The study found that the number of industry groups superior to insurance — more profitable and less risky — was about three times the number of industry groups inferior to insurance.

Similar results were found when ISO examined all firms within each industry group, not just the 20 largest companies. However, not all insurers fared poorly. About one-fourth of individual insurers in the analysis were superior to the typical firm in the non-insurance industry groups.

The property/casualty industry's 10.1 percent average rate of return during the two insurance cycles from 1978 to 1994 also was lower than the corresponding rates of return for five out of six key composite indices, including the Standard & Poor's 500 and the Standard & Poor's Financials. Yet:

  • The property/casualty industry faced more risk than four out of the six composite indices.
  • Insurers' average rate of return on net worth was 1.5 percent higher than the yield an investor could have earned investing in a risk-free ten-year U.S. Treasury bond.
  • Stockholder-owned insurers have earned higher returns, but have faced greater risk, than policyholder-owned mutual companies.
  • Commercial-lines insurers have been more profitable, but have faced more risk, than personal-lines insurers.
  • Agency companies have been more profitable, but also more risky, than direct writers.
  • The major short-tailed property lines have been more profitable, but also more risky than the major long-tailed lines. Catastrophes contributed to the volatile results for the property lines, while year-to-year changes in reserve adequacy smoothed results for liability lines.

Release: Immediate

Giuseppe Barone / Erica Helton
MWW Group (for ISO)
gbarone@mww.com / ehelton@mww.com

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