Insurers Take Double Hit From Slow Economy, Falling Rates
July 08 2010 - 3:13PM
Dow Jones News
The slow economy and falling insurance rates have produced a
rare one-two punch for property-casualty companies, said Mark
Watson, chief executive of Argo Group International Holdings Ltd
(AGII).
Commercial insurance clients have been cutting back on coverage
as they close factories, dismiss workers and cut costs, even as the
sellers of the coverage continue to cut rates to retain their
customers. While insurer revenue typically shrinks with a
contracting economy, and also declines when the industry is in a
trough of its boom-and-bust pricing cycle, the two factors haven't
socked the industry at any single point in memory--until now,
Watson said.
Industry surveys show that the price of U.S. commercial coverage
has been declining since 2004--with exceptions only for specialized
corners of the market, like coverage of offshore energy operations
in the Gulf of Mexico. There's no sign of a significant pricing
reversal ahead, said Watson, who has headed Bermuda-based Argo, a
specialty insurer, for more than a decade.
"Rarely has the bottom of an insurance cycle tracked the bottom
of an economic cycle," Watson said in an interview Thursday. "For
the first time, we're actually seeing a reduction in demand with an
oversupply" of insurance capacity.
The two factors have produced the first three-year decline in
the value of policies sold since 1933, according to data compiled
by the Insurance Information Institute.
While some indicators suggest an economic recovery has begun,
Watson said the factors that would prompt a reversal in insurers'
fortunes haven't shown much improvement.
"A significant amount of our new business comes from start-ups,"
he said. "There aren't any. Small business owners are not hiring
and not starting new businesses."
While the U.S. unemployment rate has dropped to 9.5%, the
decline has been linked at least in part to people giving up on
looking for work. In fact, the Labor Department reported a decrease
of 125,000 nonfarm payrolls in June.
Amid the troubles in the economy, a quiet hurricane season last
year and a recovery in insurer investment portfolios provided the
latest fodder to fuel commercial insurance price declines. Private
U.S. property-casualty companies produced an industry-wide
underwriting loss $3.1 billion in 2009, but that was offset by
income from investments, according to the Insurance Services
Office, and the industry's net income was $28.3 billion. That
compares to $3 billion the year before.
Rivals in the industry, including Bill Berkley, the CEO of W.R.
Berkley Corp. (WRB), have argued that insurers will soon have to
raise rates and add to their reserves as their years of cost
cutting finally catch up to them.
But Watson said any corrections are bound to be minor, if they
occur at all, unless a catastrophic event like a major hurricane or
other disaster causes some insurance companies to fail.
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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