Survey: Industry Leaders Believe the Industry is Now in a Hard Market

Leaders of the property/casualty insurance industry believe the worst of the financial crisis is over and that the industry is now in the early stages of a hard market, according to a survey conducted by the Insurance Information Institute (I.I.I.) at its 16th annual Property/Casualty Insurance Joint Industry Forum.

Seventy-five percent of executives in the property/casualty industry expect an improvement in profitability in 2012; and in fact, 72 percent believe the industry is on the road to recovery.

“The consensus among forecasters is for growth of the U.S. economy in 2012 at a little over a 2 percent annual rate, net of inflation,” said Dr. Steven Weisbart, senior vice president and economist with the I.I.I. “In that scenario, the demand for property/casualty insurance will increase modestly, both in terms of personal and commercial coverages,” he said. “The industry is well capitalized to provide this additional coverage and to pay claims under it without difficulty. Rates will be determined, as they should be, by state- and local-level market conditions, recognizing the impact of inflation on claims and the effect of lower investment income than the industry has earned in prior years.”

Looking at the industry’s profitability, a majority of industry leaders believe that profits will improve in most property/casualty lines. Broken down by lines of insurance, 63 percent of respondents believe there will be an improvement in personal auto and 67 percent expect an improvement in homeowners. While 72 percent of respondents expect an improvement in commercial lines, 55 percent do not expect an improvement in workers compensation.

Sixty-seven percent of respondents believe that premium growth will be higher; 31 percent believe it will remain flat, and only 2 percent believe it will be negative. In terms of capacity, as measured by policyholders’ surplus, 56 percent of respondents expect it to increase; 35 percent believe it will remain flat; and 9 percent believe it will decrease.

As compared with 2011, 78 percent of respondents believe the combined ratio will be lower in 2012. The combined ratio is a percentage of each premium dollar a property/casualty insurer spends on claims and expenses. The combined ratio was 108.2* in the first nine months of 2011. A combined ratio over 100 means that claims payments plus expenses exceeded insurance premiums. One way to lower expenses is by consolidation; however, 71 percent of respondents do not expect an increase in consolidation among insurers and reinsurers.

In the area of torts, 70 percent of respondents believe that tort trends will remain the same in 2012; 26 percent believe it will deteriorate; and only 4 percent believe it will improve.

On the investment side, 75 percent of industry leaders expect an up year in the equity markets in 2012 (but for the industry as a whole, equities constitute only about 15 to 20 percent of invested assets). About 70 percent of invested assets are in bonds.

Industry leaders were asked whether they expect interest rates to rise. Only 19 percent thought they would rise; 78 percent thought they would remain flat and 4 percent thought interest rates would fall.

Industry leaders were also asked whether they believe the new Federal Insurance Office is off to a good start. Eighty-five percent said it was too soon to tell; 13 percent thought it was off to a good start and 2 percent thought it was not off to a good start.

*Includes mortgage and financial guaranty insurers. Excluding these insurers, the combined ratio was 109.9.