A.M. Best’s P/C Review/Preview Report: Keeping Pace – Success for Some, but Pressures Remain

February 10, 2004

While underwriting improved, with a year-end 2003 combined ratio forecast at 101.1, the property/casualty industry has a long way to go before strong returns can be achieved, according to A.M. Best Co.’s annual Review/Preview report.

According to the report, recent improvements in operating performance have been hard fought and aren’t without continued pressures from a variety of fronts. Continued underwriting enhancements, cost efficiencies, price monitoring and investment diversification are just a few of the necessary fundamentals to stay ahead. The market has waited for the first sustained period of price firming for more than 15 years.

While rates in most segments have improved markedly in recent years, they came from a very depressed level, leaving uncertainty for the adequacy of rates even after a series of significant rate actions and underwriting restrictions. Rate increases have slowed or have even flattened in some cases, namely in property. However, it’s too soon to tell if rates are appropriate. But one thing is certain: the low-interest-rate environment has put more dependence on underwriting results as the principal driver of operating performance.

Reinsurance has contributed to market turns in the past. Looser pricing and standards can soften a market, while the inverse can drive it in a more positive direction. Certainly, pricing and changes in terms and conditions have contributed significantly to the harder market in recent years. Established companies and the rash of new start-ups launched after Sept. 11, 2001, have brought more than $16 billion of new capacity. While these companies have grown over the past two years, it was basically from market disruptions in the United States, London and Europe, and not from the significant undercutting of prices.

The industry reportedly needs to continue to adhere to the stricter underwriting disciplines reintroduced – or perhaps introduced – over the past two years. By maintaining underwriting fundamentals, the industry can better mitigate the myriad other issues, including weather, investment, inflation, regulatory and political issues.

Some of the trends and issues A.M. Best expects to see in 2004 include:

— Prices continuing to increase, as many variables erode the adequacy of pricing, including loss-cost trends, reinsurance costs, interest rates and prior-year reserve development.

— Further sizable reserve actions as more companies move to solidify their balance-sheet strength, given the strong pricing environment.

— The spread in the use of ratings trigger clauses by brokers and tougher acceptance guidelines for reinsurers.

— Companies maintaining discipline and a strong balance sheet will be in a position to take advantage of capacity issues, as there will continue to be disruption within certain marketplaces. Strong companies will be in a position to pick up a solid book of business.

— The formation of new insurance organizations and a declining success rate of these new ventures as market conditions begin to soften.

BestWeek subscribers can download a free printed copy of the full 24-page special report, “Keeping Pace,” and a spreadsheet file of the report data at www.bestweek.com. Nonsubscribers can download a printed copy of the full 24-page special report for $75 or a combination of the printed report plus a spreadsheet file of the report data for $200 at www.bestweek.com.

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