COMMENT: Starting 2011 in optimistic mood

COMMENT: Starting 2011 in optimistic mood

I was surprised to see the results of a poll taken at the Insurance Information Institute (III)’s 15th Property/Casualty Insurance Joint Industry Forum in New York this week. It seems the majority of the US industry is in bullish mood heading into the new year.

Ninety-four percent of the executives surveyed at the forum believed the worst of the financial crisis is behind the industry. This seems fair enough. But the III also reported that the majority of leaders believe profits will improve in most property/casualty lines. This seems a bit over-optimistic to me, given the challenges facing the industry.

The optimism is greatest in personal lines, with 59% expecting an improvement in personal auto and 61% expecting an improvement in homeowners.

Less surprisingly, the executives gave a more sober prognosis for the commercial side of the business – 24% of respondents expected an improvement in commercial lines excluding workers’ compensation, while 76% did not expect an improvement. Only 14% expected workers’ comp to improve.

Speakers at the forum certainly did not sound over-optimistic.

For example, Liam McGee, CEO of The Hartford, commented: “In personal lines there is clearly an improvement in the rates we are getting, but nowhere near where it should be on homeowners. The challenge remains in the middle market. The pricing is not rational right now. That will be an issue for us and others in 2011. We all talk about , but we will have to do it in 2011.”

McGee added: “2010 was an acceptable year, a good year. you can’t avoid the fact that in those good numbers you’ve got a release of prior year reserves and returns that are not the kind you want over trend. This year is one where underwriting discipline and managing costs are going to be more important than ever because we can’t allow the results of 2010 to delude us into thinking they are better than the true underlying numbers suggest.”

Tony Kuczinski, CEO of Munich Re America, added the reinsurers’ perspective: “You can’t just look at calendar year results. If you look at the underwriting performance and fundamentals on an accident year basis, they continue to worry me. But for release of prior year reserves to help calendar year results, but for a relatively calm cat year, we would have been in a worse position.

“2011 is half baked in already, so it is hard for me to believe the accident year is better this year. We are five plus years into a rate decrease environment. There is 35% less rate in the reinsurance industry than at the peak of the market. What we have seen in the 1990s is part of what we may see this time.”

Other answers given by the respondents to the III’s survey showed that the industry is all too aware of challenges facing it. The combined ratio was expected to be higher in 2011 by 68% of respondents. Thirty-seven percent thought tort trends would deteriorate in 2011, while 53% thought they would stay the same. In addition, 57% thought inflation would accelerate this year.

So if the majority of respondents believe their combined ratio will worsen while inflation increases, it seems they are banking on a turnaround in investment results to improve profitability. It is possible that the asset side of the balance sheet will provide more joy for insurers this year, but it is a dangerous game for insurance executives to pin their hopes on this.

Kristian Moor, president and CEO of Chartis, the general insurance operations of American International Group, warned at the forum: “Investment portfolios won’t perform the same, accident year results are much worse than calendar year results and the return on equity for the industry is pretty poor. These are all things people need to pay attention to as we go into 2011.”

Despite combined ratios looking like to worsen, 31% of those surveyed still thought premiums will grow, 16% thought they will fall and 53% thought they will be flat. This suggests that competition will remain fierce.

When asked whether consolidation will increase among insurers and reinsurers in 2011, 86% of attendees said yes and 14% said no.

Attendees were also asked about last year’s financial reform in the US – 33% of attendees believed it would be harmful to the industry, 59% thought it would be neutral and 8% thought it would be helpful. Respondent were split about the effect of the newly-created Federal Insurance Office – 50% thought the office would be positive for the industry and 50% thought it would be negative.

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