Looking to the future

Rough Notes, May 2003 by Zinkewicz, Phil

A variety of factors are slowing the P-C industry turnaround

That the property and casualty insurance industry is in the midst of a hard market is unarguable, but does the hard market necessarily mean that P-C insurers have seen the light at the end of the tunnel in terms of profitability? In past hard markets, increasing prices have helped the insurance industry experience a turnaround from soft market excessive competition. Will that be true now?

Recently, Steve Dreyer, credit analyst and insurance practice leader for Standard & Poor's, addressed those questions, pointing out what he perceives as potential barriers to insurers capitalizing on the current strong and unprecedented pricing environment.

Speaking before a meeting of the Council Insurance Agents and Brokers (CIAB), Dreyer said those barriers include losses stemming from: asbestos and environmental liability; directors and officers liability business; uncollectible reinsurance; backlash from abuses of surety contracts; terrorism; deterioration of asset quality; and a struggling economy. Right now, S&P has a "negative" outlook for the property/casualty industry. He added, however, that, if prices remain strong throughout 2004 and if the negative factors he mentioned are moderated, then S&P might change its assessment of the industry to "stable."

Bernie Heinze, AAMGA executive director, says he agrees that the factors Dreyer mentioned are indeed slowing down a turnaround of the property/casualty business, but he adds three more-the current malpractice situation, the need for tort reform, and the deteriorating condition of the investment market.

"We have a situation in which, in certain states, doctors are leaving their practices or severely curtailing the procedures they are willing to perform," says Heinze. "Premiums are rising because of high jury awards and physicians and hospitals are finding it difficult to pay the increases. We need reform of the medical malpractice insurance arena. Some states have acted to establish caps on non-economic damages, such as pain and suffering and punitive damages. That would go a long way to help the problem.

"While we're at it," continues Heinze, "we need to take a strong and hard look at the overall tort liability system. We have to make sure that injured parties are compensated, rather than just [those in] the legal profession."

Addressing the issues of reinsurance collectibles, Dreye, struck a somber note. "Take a look at the huge reserve increases that are being announced by insurers every day for asbestos and environmental losses. In one breath, they are announcing staggering multi-billion reserve increases, and then they tell us ... 'don't worry; our reinsurers will pick up nearly all of our losses: We at S&P are not convinced that reinsurers of these policies written many years ago-if they even exist today-are going to be so agreeable. Although most ceding companies have acknowledged and accounted for