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Market Update
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Insurance Market Dynamics - U.S.
Printable Version
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The property-casualty insurance market cycle is inexorable, if not
precisely predictable. At the end of 2007, it was clear that the market
was "soft," benefiting buyers with increased competition on price and
other terms and conditions.
The Soft Market Story
Insurance carrier profits rose significantly from 2001-2007 (Fig. 1).
The most closely watched profitability metric—combined ratio*—had
improved for many companies, and the industry combined ratio was at
a historic low in 2006 (Fig. 2).
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Insured losses, including natural catastrophes, had been
modest in 2006 and 2007 following the disastrous hurricane
year of 2005. Investment income—a major source of insurer
income—was also solid, leading to an industry return on
equity of 12.8 percent. This profi tability has helped the industry
grow its surplus or capital base to $500B, 75 percent above where
it was six years ago. The industry is awash in capital (Fig. 3).
Buyers have seen steadily declining prices for property-casualty
insurance since 2004. Prices continue to fall, except in select
markets, according to the latest survey of agents and
brokers (Fig 4).
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The rout in the investment markets during the third quarter
(now continuing into the fourth) implies that insurers will be
recording very large realized and unrealized capital losses on
their books—likely in the tens of billions of dollars. This
will contribute to hasten the drop of industry surplus, which
peaked in the third quarter of 2007 (Fig. 6).
Trouble Ahead?
However, insurance carriers face an ominous set of facts
now as we enter the fi nal months of 2008.
The fi nancial signals that once pointed to a continued soft
market now point to changing dynamics and the potential for
pricing pressure. It is not clear that prices will harden in the
immediate future, but the financial facts about the propertycasualty
insurance market indicate the pressures are looming,
and we must all be prepared.
In the fi rst half of 2008, insurer profi ts declined 57
percent, the industry posted its worst fi rst-half (Fig. 5) year
underwriting performance since 2002, investment returns
declined by 18 percent and net written premiums for the
industry as a whole were stagnant. Catastrophe losses were
double the average of the past decade. And that does not
account for the losses from Hurricane Ike and other storms
in the third quarter.
Ominously, the industry combined ratio deteriorated from to
102.2 percent in the fi rst half of 2008 from 92.7 in the same
period a year earlier. It is certain that this closely watched
number will deteriorate further in the second half of the
year given the losses from hurricanes and other increasing
losses (Fig. 7).
What’s Next?
Is the situation desperate? No.
Industry insurance capacity remains near record highs, so there
is plenty of capital. The industry as a whole is stable, profitable
and capable of meeting its claims commitments and taking on
new business. At the same time, with investment returns dropping sharply, and no change in the expected losses insurers
face, it is clear that underwriting margins are going to have to pick up the slack. In other words, a return to a more disciplined
commercial pricing environment seems inevitable.
Altogether, declining profits, deteriorating underwriting results, shrinking capacity, the credit market challenges, a slowing
economy and specific problems at some insurers are creating a volatile mix of issues that could pressure insurance prices in the
coming weeks and months.
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