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Property and Casualty 2004 results

The property and casualty industry had a banner year in 2004, making money on an underwriting basis for the first time since 1978. The combined ratio of 97.9, combined with investment profits produced a return on equity of 10.4%, a significant improvement over historical results.
Explanation for non-insurance folks. The combined ratio is the sum of claims and administrative expenses, and represents all of the claims, underwriting, sales, and other expenses. Typically the P&C industry loses money on an underwriting basis (producing combined ratios of over 100%) and makes money on investing the premiums customers have paid. As many P&C insurance lines have long “tails”, claims may not come in for several years, and may not be paid in full for decades, allowing the insurer to reap the investment returns.
While all looks rosy, the underlying picture is somewhat troubling. The returns were driven by both increased prices for insurance and decreases in claims expenses. However, the growth in premiums is rapidly tailing off, with AM Best predicting growth in 2005 to be well below 2004’s 4.7%.
To quote Best,
“As a sign of things to come, net premium growth was only a little better than half the percentage increase for 2003. A.M. Best data show that increases in net premiums written have been reduced for the second straight year, from a peak increase of 14.7% in 2002 to 9.5% in 2003 and 4.7% in 2004. With the deceleration of rate increases giving way to price decrements in the latter half of 2004 in most major commercial and reinsurance lines, and with the expectation that this will be the norm in 2005, A.M. Best expects written premium growth will slow to 1.2% in 2005.”
This is happening because more insurers are seeking to cash in on the profitability boom, equity markets are poor alternatives for capital investment, the bond market returns are marginal at best, and real estate appears to be in or headed for a bubble. Why does this matter? For the simple reason that large investors are always looking for places to invest their money, and with other alternatives appearing strikingly unattractive, many are considering “parking” their funds in what is today a profitable vehicle, insurance capital.
The more that happens, the more price competition occurs. Thus the cycle begins anew, with price pressure leading to price cuts, leading to declining margins.
What does this mean for you?
P&C rates are likely to decline in the near future, especially for short-tail lines such as property and fire. Workers’ comp will not be far behind, with liability following soon after.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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