A New Urgency For Underwriting Discipline

With catastrophe damage creating insured losses across the country, property and casualty insurance carrier results suffered in the first half of 2011.

New analysis from Lockton Inc. notes that losses from catastrophes nearly tripled, increasing to $23.9 billion in 2011 from $8 billion during the first half of 2010. As a result of these losses, the industry’s combined ratio declined to 110.5 percent, which is the worst six-month result since 2001.

In addition to claims, the investment climate impinged on carrier’s return on capital as low interest rates and declining yields sank investment income. Lockton notes that net income totaled $4.8 billion in the first half of 2011. By way of comparison it totaled $16.8 billion in the first half of 2009.

Mark Moreland, EVP and Director, Risk Management for Lockton, notes that one bright spot for insurers is that the market while remaining soft “appears to be at or very near the bottom of the pricing cycle.” Moreland carriers may consider reducing their market share and attempting to achieve small, single-digit rate increases at renewal rather than engaging in price cutting to retain business.

“The dilemma for insurance companies is clear,” Moreland writes. “They must figure out how to deploy their capital at higher rates while the overall level of capital is placing pressure on prices. Share buybacks, dividend increases, and merger and acquisition activity would all seem to be plausible scenarios at some level, but price discipline is the only real panacea.”