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Survey Shows Slower Premium Growth

Mar 31, 2007

By Anonymous

The Insurance Information Institute (III) invited a panel of Wall Street stock analysts and industry professionals to forecast the outlook for the industry. According to the III, most insurance industry analysts predict slower property / casualty (P/C) premium growth for 2007.

The annual survey results indicate that the respite in catastrophe losses in 2006, combined with a strong performance in virtually all other major lines of P/C insurance, will likely propel the industry to its best underwriting performance since 1936. Analysts further expect the industry's profitability to continue in 2007, albeit with an underwriting performance that generates a much smaller underwriting profit; the trend of decreasing underwriting profits is expected to continue in 2008.

The poll also shows that analysts uniformly expect premium growth to become even more sluggish in 2007 and 2008. This apparent paradox - a peak in industry profits, but stalling premium growth - is a reminder of the cyclical nature of the P/C business and the fact that the industry's financial fortunes are influenced by a number of factors, according to the III.

The average forecast calls for an increase in net written premiums of just 1.8% in 2007, a substantial slowdown from the 3.3% estimated for 2006. The 1.8% increase in premium growth that analysts forecast for 2007 would be the third slowest rate of growth for P/C insurers since 1998, during the depths of the last soft market. It represents a near halving of the estimated figure for 2006. For 2008, the average forecast calls for an equally modest increase in net written premiums at just 1.9%.

According to the III, falling insurance prices are lowering the cost of doing business, driving a car, or owning a home. For example, countrywide auto insurance expenditures are expected to fall 0.5% in 2007 - the first drop since 1999. Businesses will see declines of 5% or more in 2007 across their entire insurance program. Overall, the share of P/C insurance premiums relative to the overall economy will shrink by about 2.5 and 3.1 percent in 2006 and 2007, respectively.

Though top line growth has slowed to a near standstill, profits (measured in dollar terms) and profitability (as measured by return on equity, or ROE) are rising due to a variety of factors, including an ebb in catastrophe losses in 2006. The respite in catastrophe losses means that 2006 was a sorely needed rebuilding year for insurers; many insurers have used the opportunity to restore their claims paying resources and to reinvest in the future of the industry.

The combined ratio - the ratio of losses and expenses to premiums - for 2007 is projected to be 96.6, a deterioration from an estimated 93.2 in 2006. The 93.2 estimate for 2006, if accurate, would represent the industry's best underwriting performance since the 93.3 combined ratio recorded 70 years earlier in 1936. If, as predicted, the combined ratio in 200-7 comes in under 100, it would produce just the third underwriting profit in the P/C insurance industry since 1978.

It is important to note that the estimate for 2007 assumes a return to "normal" levels of expected catastrophe loss. This said, underwriting profits in 2007 will likely-fall significantly from 2006 levels. The considerably slimmer margin of underwriting profitability will also be eliminated entirely if CAT losses return to 2004/05 levels.

Analysts' forecasts for net written premium growth in 2007 which range from 0.1% on the low end to just 3.1% on the high side - reflect the fact that pricing and underwriting discipline, the industry's historical nemeses, remain a key issue. Regulators, especially in catastrophe prone areas, are reluctant to allow insurers to charge risk-based rates. Most insurers are also paying more for reinsurance, which causes them to report lower "net" written premium growth figures if they cannot fully recoup those costs at the retail level.

Fortunately for insurers, at least some of the momentum built in 2006 will be carried into 2007 and 2008. That being said, insurers will need to come to grips with a variety of challenges unrelated to catastrophe losses, including increasing price pressure and the slow growth environment that could erode underwriting performance and profitability in the year ahead.

Copyright Telex Communications, Inc. Apr 01, 2007

(c) 2007 Toledo Business Journal. Provided by ProQuest Information and Learning. All rights Reserved.

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