Insurance industry profitability unchanged in 2008 but increased claims expected to pressure ‘09 profitsDOWNLOAD
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The J.P. Morgan Deloitte 2008 General Insurance Industry Survey released today highlighted that profitability in the industry remained unchanged from 2007 with an overall combined ratio of 94%. “However there was a noted difference between classes, with participants expecting sharp improvements in combined ratios in personal lines, coupled with significant deterioration in long tail commercial lines,” said Siddharth Parameswaran, J.P. Morgan Senior Insurance Analyst.
“Whilst combined ratios may hold up, we believe there will be added pressure on profits at least in the short term from the effects of the financial crisis on both claims and falling yields,” he said.
Deloitte partner, Stuart Alexander who co-launched the survey, pointed to the weaker economic outlook saying it is expected to have an adverse impact on claims. “A number of respondents indicated that the poor economic outlook for 2009 was a concern,” he said.
“Generally speaking, the number of fraudulent claims and litigation tends to increase during weak economic conditions, which can then have an impact on Professional Indemnity, Director’s and Officers, Workers’ Compensation and Commercial Property insurance,” Alexander said.
Parameswaran noted that some classes such as motor and householders’ could actually face lower claims costs as in adverse economic conditions, there is often reduced vehicle usage and lower building costs.
In 2008 claims frequency did increase in a number of classes primarily due to one off events such as storms which impacted personal lines (motor and home) in particular. Claims frequency in the long tail liability classes (such as professional indemnity and directors and officers) also increased a little. In this instance respondents indicated that weakening economic and financial market conditions may have resulted in increased claims.
“Industry participants are expecting rates to rise and storm costs to normalise,” Parameswaran said. “I think the direction forecast for loss ratios is right and that rates are rising and reinsurers will pick up a large part of any storm damage costs in 2009. Also public and product liability will tick up. The extent to which they do is contingent on the state of the economy and financial markets.”
Parameswaran added: “We think there will be more pressure on profits this year before an uptick in 2010.” He also commented that in his view “general insurance companies are likely to face less financial pressure stemming from the financial crisis than life insurers and banks.”
“However, we expect there will be some pain for insurers and reinsurers that have exposure to commercial, long tail insurance lines in particular. How insurers deal with these stresses depends ultimately on how quickly they move to increase rates.
We believe the classes where rates are likely to rise the fastest are those where capacity is constrained and there are significant barriers to new entrants. Also where there has been significant consolidation, there is a more rational, less competitive environment. In addition losses are always a good excuse for rate increases.
“We suspect that it will take a few months at least before adequate rate increases flow through, implying some short term pain to insurance margins.”
Rates in 2008
The survey revealed that in 2008 premium rates in commercial classes continued to fall with long tail rates down by an average of 7% on top of the 10% reduction in 2007. Short tail rates however, bottomed out in 2008, picking up 1% compared to a 7% fall last year.
“We do expect commercial rates to turn in 2009 given the deterioration in profitability in some lines, coupled with expectations for higher claims costs and falling yields as a result of tougher economic conditions. Survey respondents also expect to see commercial rates bottom in 2009 and increase in 2010,” Parameswaran said.
Premium rates in the personal lines increased in 2008 and are expected to continue to rise. “Rates in personal lines increased 3% on average in 2008, compared to no movement in 2007. This was due to accumulated storm losses in 2007 and 2008 encouraging increases,” he explained.
Parameswaran said: “We expect rates to continue to rise in the coming year given falling investment yields, the fact that the Australian market is dominated by a few large players, and their consensus that rates in personal lines need to increase.”
Top five issues for the industry in 2008
For the third consecutive year the J.P. Morgan Deloitte General Insurance Industry Survey asked respondents to nominate and rank the five most important issues impacting their business.
Stuart Alexander said: “In 2008 economic conditions became the most important issue along with climate change for underwriters (60%) and as the standout issue for brokers (71%).
“Economic conditions were not mentioned in the top five in 2007 for either group. Climate change moved from fourth place in 2007 and 2006 to equal first with economic environment for underwriters,” he said.
Market environment: Underwriters noted that increased claim costs caused inflation in some long tail classes and most short tail classes. Underwriting discipline was also a critical factor in maintaining profitability. (...continued)
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