P&C Insurers See Rebound in 2010

Forrester Research recently predicted the technology sector is will see a recovery in 2010. The same could hold true for the property/casualty insurance industry. According to a survey conducted by the Insurance Information Institute (I.I.I.) at its 13th annual Property/Casualty Insurance Joint Industry Forum, 77% of executives in the property/casualty industry expect financial troubles to diminish in 2010.

Yet, looking at the industry’s profitability, a majority of industry leaders believe that profits will not improve in most property/casualty lines. Broken down by lines of insurance, only 51% of respondents believe there will be an improvement in personal auto; 37% expect an improvement in homeowners; 16% of respondents expect an improvement in workers compensation; and 23% of respondents expect an improvement in commercial lines.

In terms of inflation, 71% of executives believe it will accelerate in 2010. Looking at premium growth, 51% of respondents believe that it will remain flat; 36% believe it will be negative; and 14% believe it will be positive.

As compared with 2009, 79% of respondents believe the combined ratio will be higher in 2010. “Looking forward to 2010, the economic environment will improve, but only gradually, and we will have difficulty coping with some severe problems related to the ‘Great Recession,’” says Steven Weisbart, SVP and chief economist with the I.I.I. “For example, long-term unemployment—people unemployed for 27 weeks or longer—grew to more than 6.1 million as of November 2009, up from about 1.3 million at the start of the recession. Research shows that, when these people finally get new jobs, 40% will accept lower pay than from their prior job. This affects consumer buying power in general and the workers compensation exposure base in particular.”

“Insurers invest mainly in intermediate-term and long-term bonds, and in prior years when interest rates were higher investment gains could overcome underwriting losses,” Weisbart explains. “But interest rates are likely to stay low for 2010 at least, so that investment gains are again (as in 2009) not likely to provide a large enough source of funds by themselves to generate enterprise returns that meet or exceed a firm’s cost of equity capital.”

A recent Ernst & Young report sings the same tune: P&C insurers did not suffer losses as a result of financial crisis, they will still feel its effects, as they are no longer able to rely on investment income to offset underwriting losses. Accordingly, the report says P&C insurers must place a new emphasis on expanding in more profitable underwriting markets while controlling risks in less profitable ones.

In the area of torts, 72% of respondents of the I.I.I. survey believe that tort trends will deteriorate in 2010; 25% believe they will stay the same; and only 3% believe they will improve.

Looking at consolidation, 72% expect an increase among insurers and reinsurers.