Combined ratio improved, but overall profitability lagged long-term norm.
The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 103.2 percent for 2012 from 108.1 percent for 2011. Moreover, underwriting profitability improved for each of the three major segments of the property/casualty insurance industry. Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio dropped 2.4 percentage points in 2012 to 102.3 percent as balanced insurers’ combined ratio improved by 4.7 percentage points to 104.6 percent and personal lines insurers’ combined ratio fell 4.8 percentage points to 101.1 percent. Reflecting the improvement in combined ratios, the insurance industry’s overall rate of return on average surplus climbed to 5.9 percent in 2012 from 3.5 percent the year before.
Nonetheless, property/casualty insurers posted $16.7 billion in net losses on underwriting for 2012, as they incurred $1.03 in losses and other expenses for each dollar of premium. Insurers last posted net gains on underwriting in 2006 and 2007, with the combined ratios for those years being 92.4 percent and 95.5 percent, respectively. From 2008 to 2012, the combined ratio averaged 103.9 percent, and insurers’ net losses on underwriting totaled $87.6 billion — more than enough to erase the $50.4 billion in net gains on underwriting in 2006 and 2007.
“As good as insurers’ results for 2012 were compared with their results for 2011, they pale in comparison with long-term norms. Insurers’ 5.9 percent overall rate of return for 2012 fell far short of their 8.9 percent average rate of return from 1959 to 2012,” said Michael R. Murray, ISO assistant vice president for financial analysis. “ISO estimates that, with today’s investment yields, financial leverage, and tax rates, the combined ratio would have to improve by an additional 4.6 percentage points to 98.6 percent for insurers to earn their long-term average rate of return.”