Property/Casualty Insurers' Record Profit Obscures Concerns Over Underwriting Performance, ISO Study Shows

NEW YORK, June 19, 1997 — The property/casualty insurance industry's record net income of $24.1 billion in 1996 disguised a pattern of deterioration in insurers' fundamental underwriting performance, an ISO analysis shows.

ISO analyzed the impact of variables that can distort underwriting results: catastrophe losses, environmental and asbestos (E&A) losses, and changes in reserve adequacy for losses other than E&A. A large part of the increase in net income in 1996 was attributable to these three factors, according to a new study by Insurance Services Office, Inc., (ISO).

Catastrophe losses declined from $8.3 billion in 1995 to $7.4 billion in 1996. ISO estimates that newly recognized E&A losses, predominantly for policies written before 1986, declined from $11.0 billion to $5.8 billion. Furthermore, ISO's preliminary estimate suggests that insurers weakened reserves for losses other than E&A by $7.9 billion in 1996.

The industry's reported combined ratio improved from 106.4% to 105.9%. Adjusting catastrophe losses to long-term norms, the industry's combined ratio remained steady. Adjusting for catastrophes and E&A losses, the combined ratio actually deteriorated by 2.0 percentage points. Adjusting for all three factors (catastrophes, E&A losses and changes in reserve adequacy for losses other than E&A), the industry's combined ratio worsened from 104.6% to 105.5%.

"Were it not for these distorting factors, the industry's combined ratio would have worsened by 0.9 percentage points rather than improving by 0.5 points," said John J. Kollar, ISO's vice president — actuarial services and research. "Similarly, the industry's GAAP rate of return would have fallen by 1.0 percentage point rather than rising by 0.1 points."

The ISO study cites a worsening in the adjusted combined ratio over several years. From 1993 to 1996, the combined ratio adjusted for catastrophe losses, E&A losses, and changes in reserve adequacy deteriorated by 4.1 percentage points, suggesting a weakening in basic underwriting performance.

The study also highlights the prominent role of stock-market-driven capital gains in insurers' 1996 results. Industrywide realized gains were $9.6 billion, up from $6.0 billion in 1995. Total capital gains in 1996 were $23.5 billion, second only to the record of $27.7 billion in 1995. If capital gains were closer to long-term levels, net income and surplus growth would have been significantly lower.

Other analyses included in the study reveal that:

  • The property/casualty industry's profitability still lagged that of the Fortune 500 and a wide array of non-insurance industries. P/C insurers' 8.8% rate of return in 1996 was 6.4 percentage points less than the median rate of return for the Fortune 500, and insurers also fared poorly in long-term comparisons spanning two underwriting cycles.
  • Distribution of business within the industry has changed. Market share of the top four property/casualty insurers rose from 21.6 percent in 1986 to 26.6 percent in 1996, while the market share of the fifth to fiftieth largest insurers declined from 54.4 percent to 46.4 percent. All other insurers' market share grew from 24.0 percent to 27.0 percent.
  • Agency insurers' results deteriorated as those for direct writers improved.
  • Premiums for property lines rose 5.1 percent, but a 6.9 percent decline in premiums for workers compensation limited growth for casualty lines to 1.8 percent.
  • Stockholder-owned insurers' premium growth slowed, but their profitability improved. On the other hand, policyholder-owned mutual insurers' growth accelerated but their profitability declined.
  • Reinsurers' profitability improved more sharply than that of the industry despite slowing premium growth.

For copies of ISO's study, contact ISO's customer service at (800) 888-4476.

Release: Immediate

Giuseppe Barone / Erica Helton
MWW Group (for ISO)
201-507-9500 /

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