ISO projects slowdown in growth from 9.2% this year to 6.1% next year; combined ratios of102.9 in 2003 and 101 in 2004 also projected
ST. PETE BEACH, Fla., Nov. 18, 2003 — Despite significant premium growth since 1998, the U.S. property/casualty industry's profitability continues its long downward trend, an industry leader said today.
Speaking at the annual meeting of the Society of Insurance Research, Frank J. Coyne, chairman, president and CEO of Insurance Services Office, Inc. (ISO), further warned a return to competitive excesses following a brief partial recovery could plunge the business back into another prolonged drought in profitability.
Average annual return on surplus (assets minus liabilities) fell from 13.7 percent in the 1970s to 10.3 percent in the 1980s to only 8.7 percent in the 1990s, Coyne said. "In the first three years of this decade, the industry's rate of return has averaged just 2.8 percent."
In the current business environment, achieving strong returns is harder than it used to be, said Coyne. "Consider that with a first-half 2003 combined ratio of 99.8 percent, the industry's annualized rate of return was 9.7 percent — well short of the 15 percent rate of return equity investors look for," he said. (Combined ratio measures losses and other underwriting expenses per dollar of premium.)
Coyne noted the last time the industry posted a first-half annualized rate of return of 15 percent was 1987, when the combined ratio was 104.1. "To achieve a 15 percent rate of return with today's leverage, investment results and tax rates, the industry would have to post a combined ratio in the neighborhood of 94.4 — something it has never achieved on an annual basis," said Coyne.
"The message should be clear. What used to be good enough is not good enough anymore," said ISO's chief executive.
Coyne cited increasing evidence of an end to the hard market. ISO MarketWatchTM research shows rate increases for commercial policies peaked at 12.9 percent in July 2002 and have been on a downward slide ever since, dropping to 7.7 percent this past June. A third-quarter survey by the Council of Agents and Brokers shows rates flattening in many segments of the commercial market, with rates actually falling in some.
"If the next soft market is not already upon us, the hard market certainly is coming to a close," Coyne said.
For 2003, ISO projects a combined ratio of 102.9 — a 13 point improvement over 2001 and nearly 4.5 points better than 2002. ISO further projects the industry's combined ratio will improve another two points to 101 in 2004.
ISO also projects growth will slow significantly, falling to 9.2 percent this year and 6.1 percent next, said Coyne.
Citing examples of underwriting cycles over the past 40 years, Coyne warned insurers "each improvement in insurers' results brings us closer to the next round of hyper-competition for market share.
"Insurers have paid dearly for failing to adhere to disciplined underwriting and cost-based pricing," said Coyne. Commercial policyholders, he said, "have increasingly turned to alternative mechanisms such as captives, risk retention groups and the like." Alternative mechanisms' share of the commercial market has doubled from slightly more than a quarter in 1985 to just about half today, he said.
Another serious consequence of competitive excesses has been an increase in insolvencies. Coyne noted insolvencies among property/casualty insurance companies increased to an average of 33 per year this decade, compared with 12 per year in the 1970s and 27 per year in the 1980s and 1990s.
"And despite the strongest pricing environment in more than a decade, property/casualty insurer insolvencies jumped from 30 in 2001 to 38 in 2002," he said.
Insurers faced with competitive pressure and other uncertainties, including rising healthcare costs, natural and man-made catastrophes, terrorism, asbestos claims and fraud, among others, should heed an old lesson, said Coyne.
"Sustainable profitability can only be achieved through sound risk assessment — cost-based pricing, solid underwriting and strong loss adjudication — not slavish devotion to growth and reliance on investment gain from fickle financial markets."
ISO is a leading source of information, products and services related to property and liability risk. For a broad spectrum of commercial and personal lines of insurance, ISO provides data, analytical and decision-support products; consulting; data processing; and technical, statistical and actuarial services. ISO field services include on-site rating and underwriting services and the evaluation of community loss-mitigation efforts. ISO's products help customers with sales and prospecting, underwriting, rating and quoting, customer management, policy administration, product development, claims administration and fraud detection. ISO's AIR Worldwide subsidiary provides technologies to assess and manage natural and man-made extreme-event risk. Through its ISO Claims Services, Inc. (iiX unit) and Intellicorp subsidiaries, ISO provides motor vehicle reports and criminal-records information and through its AscendantOne unit delivers rating, quoting and policy-administration solutions. In the United States and around the world, ISO serves insurers, reinsurers, agents, brokers, self-insureds, risk managers, insurance regulators and other government agencies.
About the Society of Insurance Research
The Society of Insurance Research is a non profit association founded in 1970 with members representing over 300 insurance companies and related organizations located through the United States, Canada and several foreign countries. For additional information about S.I.R. and upcoming S.I.R. events,visit www.sirnet.org or phone the society's executive director at (770) 426-9270.