RANCHO MIRAGE, Calif., March 14, 1997 — The property/casualty industry's apparent reliance on the booming equities market could be a "dangerous game," Fred R. Marcon, chairman, president and chief executive officer of Insurance Services Office, Inc., warned here today.
Marcon told the Pacific Insurance and Surety Conference that the industry's surplus grew 13 percent last year to $260 billion, almost double 1990's surplus. But he noted that more than 70 percent of the past six years' surplus growth came from capital gains, up from 37 percent in the previous two decades.
"If the industry has come to depend on highly volatile capital gains, it is playing a dangerous game," said Marcon.
He recalled that "in the 1980s the name of the game was cash-flow underwriting — that old vicious cycle of slashing premiums to attract cash to earn investment income to make up for underwriting losses caused by slashed premiums. "Warned Marcon: "Capital gains or investment income —overdependence on either can set you up for a big fall."
The unusually high capital gains posted in 1995 and 1996 may have obscured fundamental industry results, Marcon said. Last year's pretax operating income, which excludes capital gains, was down more than 8 percent from 1995, even though investment income rose more than 3 percent.
"That means the industry's underwriting loss deepened more than 10 percent last year," said Marcon." In short, the property/casualty industry's 1996 income was driven — not by underwriting results — but by a booming equities market."
Even with last year's underwriting deterioration, reported underwriting results have improved since 1992. But after adjusting for changes in catastrophe losses, the impact of environmental and asbestos claims, and changes in reserve adequacy, it is apparent that the industry's fundamental underwriting performance has been deteriorating since 1992, Marcon said.
He cautioned that the industry can't continue to count on the relatively good underwriting results of personal auto and workers compensation, which have helped counterbalance the industry's poor results in other lines. Marcon cited A. M. Best's estimate that last year's combined ratio for workers compensation increased to 103.5, up 6.5 points from the previous year.
Moreover, even in a healthy economy, property/casualty premium growth remained stagnant at an estimated 3.6 percent last year, unchanged from the year before, Marcon said.
"Insurers that rely on capital gains for profits may need to rethink their operating strategies," he said.
Marcon further observed that six major trends — consolidation, specialization, competitive pressure to cut expenses, catastrophe risk globalization of markets and technological advances — will change the industry and how it does business. "Industry consolidation will result in bigger players with bigger shares of particular markets, and the emergence of specialists with a high degree of expertise in particular markets," he said.
These new realities also will create a heightened demand for a broader array of more specialized and sophisticated value-added information, which ISO will deliver to its customers, he said.
Looking ahead, Marcon said: "Products and the methods for their delivery — which in themselves have become products — will continue to change at a rapid rate. Companies will rise, and sometimes fall, with spectacular speed. Consumer expectations will only go up. In this competitive arena, quality information, delivered instantaneously, will make the difference."