Private U.S. P&C insurers’ net income after taxes grew to $33.5 billion in 2012 from $19.5 billion in 2011, according to data from ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI). Pretax operating income rose to $33.3 billion in 2012 from $15.4 billion in 2011. Insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus climbed to 5.9 percent from 3.5 percent. While this is good news for the industry, there is cause for concern.

“As good as insurers’ results for 2012 were compared with their results for 2011, they pale in comparison with long-term norms,” said Michael Murray, ISO assistant VP for financial analysis. “For example, insurers’ 5.9-percent overall rate of return for 2012 fell far short of their 8.9-percent average rate of return for the 54 years from the start of ISO’s annual data in 1959 to 2012. Moreover, with today’s investment yields, financial leverage, and tax rates, ISO estimates underwriting profitability as measured by the combined ratio would have to improve by an additional 4.6 percentage points to 98.6 percent for insurers to earn their long-term average rate of return. Lest this seem merely academic, insurance is an essential cornerstone of commerce; and over the long term, insurers’ ability to attract the capital necessary to meet the coverage needs of an expanding economy is a function of their profitability. That is, our economic future depends on insurers being able to earn rates of return commensurate with the risks they assume.”

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