The top of the cycle
in the property/casualty industry probably occurred earlier this year. The latest numbers indicate premium growth is flat and profitability is down, albeit from a stratospheric level.
The flat premium growth is especially troubling as it coincided with a period of significant economic expansion(up 4.8%). When businesses are growing and selling more stuff, they need more inputs - and the additional raw materials, transportation, workers, new equipment, and new facilities drives up insurance costs - there's just more stuff to insure.
Claims costs aren't dropping - the medical CPI (which is far less than the WC CPI) was up 5%, the cost to repair autos was up as well (auto insurance is the single largest component of the P&C industry).
So what's happening? Simple. Insurers want to generate more profits so they sell more insurance. And that requires them to cut prices to compete. Which, in about two years, will result in significantly higher losses.
Yes, the underwriting ratio of 93.8 (first nine months of 2007) is one of the industry's best-ever numbers. Profits will decline from here on out, until 'pricing discipline' returns. Which, if history is any guide, will happen in 2-3 years.
What does this mean for you?
If you have P&L responsibility, send up a flare and document it. The good times are coming to an end.