Property and casualty results for 2005
Dr. Robert Hartwig of the Insurance Information Institute recently gave an interview to Insurance Journal on the US property and casualty industry's 2005 results, and made a few predictions about this year. According to Hartwig, 2005 will deliver a combined ratio of 99%, a surprisingly strong result given the impact of the four hurricanes. The weather had a huge effect on results; after stripping out extra-ordinary events, the industry actually would have had a combined ratio of in the 80's. (However, there are always extra-ordinary results, so I'm not sure what stripping them out does…)
Notably, the results of US companies were not hit nearly as hard as those of reinsurers, most of which are located offshore. Hartwig said that 57-67 pct of losses were absorbed by foreign insurers and the residual markets, so the red ink won't show up in US company results.
Despite reinsurers' hits, which resulted in a combined ratio of 124, (the second worst year since 2001), capacity is still there. In fact, about 12 new reinsurers have been formed in the last year in Bermuda and a couple other areas
Hartwig attributed the good financial results to a return to underwriting discipline - insurers got serious after 2001 (after they got hammered in the late nineties by lowering prices way past the stupid line), and although there was weakening of this discipline in commercial property in 2005, it likely returned after the fall's hurricanes. Hartwig was asked if he thought the losses in the fall would mean the emergence of a mini-hard market.
His response - Some analysts think so, but he does not think it will "spill over to casualty markets"; it will stick w commercial property, homeowners, and geographic areas subject to wind risk - no other "spill over" into casualty lines. I don't agree, as the impact will be most significantly felt by reinsurers, who will pass their extra costs along to all their customers in the form of higher premiums. While new reinsurers are forming now, they all know weather patterns are troubling and are going to build a "risk" charge into their prices. So, my sense is the storms will have an impact on all property and casualty lines.
Premium growth came in lower than expected in 2005 due to a semi-softening of the market. The expectation is that it will accelerate to almost 5% in 2006, but Hartwig thinks that's not likely, especially if cat losses return to modest levels. External factors - tort environment issues; the Class action fairness act; issues re med mal, asbestos, stil exist, but there are want fewer things to worry about in 2006 than in past years, e.g. Spitzer investigations have quieted down w brokers settling.
In his view, the Spitzer and other Attorneys General investigations do not have much of an impact directly on brokers' bottom line due to relatively small dollar impact of the fines. However, the indirect impact has been significant due to absence of contingent commissions for large brokers.
One glaring omission occurred when he was asked what he thought the major issues would be for the P&C market. Hartwig never mentioned anything about health care cost inflation. With health care costs driving workers comp, medical malpractice, auto/PIP, general liability, etc, one would think that the industry's inability to keep inflation below the double digits (especially when the group health world rate is well under that level) would raise a red flag.
As long as the experts, like Dr. Hartwig, aren't paying attention, the health care cost problem will continue to be ignored. And that's a big problem.
What does this mean for you?
Hartwig is a well-respected and insightful analyst with broad experience. His opinions are worth considering. My bet is prices stay level or firm somewhat in most P&C lines. As to his ignorance of health care costs, that I just don't get.