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With after-tax property/casualty insurance industry profits hovering around $60 billion in 2006, a combined ratio in the low 90s, return on equity around 13 percent or 14 percent, and balance sheets the cleanest they've been in a decade, you'd think property/casualty insurance chieftains might be in the mood to give buyers a break, even slash prices on commercial policies perhaps?

If only buyers were so lucky.

The rate drop is slight, though, because there's plenty to worry about, according to property/ casualty executives, even after 2006 was a welcome reprieve from the brutal and expensive storms of 2005 and 2004.

"The message I give is that we have to be cautious," says James J. Schiro, CEO of Zurich Financial Services. There will be no gloating, at least not in public, over the stellar year for P/C carriers that was 2006.

Cautious? Yes, indeed.

First, there's the pesky issue of the Democrats in Congress, who tend to favor the rights of plaintiffs over the concerns of defendants in matters regarding disputed claims. That means carriers can expect congressional leaders to "pull back on the tort (reform) environment," at least for the next two years, says Jay Gelb, senior vice president and senior nonlife insurance equity analyst with Lehman Brothers.

In tort disputes, a carrier's loss is a commercial claims plaintiff's gain, but only in the short term. Every loss in court adds to the pressure on carriers to eventually raise premiums to pay for million-dollar verdicts.

Second, profitability in commercial insurance is not expected to improve in 2007. A poll of property/casualty executives by the Insurance Information Institute found that 54 percent of respondents said they thought workers' comp lines would not be profitable in 2007, for example. In commercial lines, 70 percent of the respondents said they did not expect to make a profit in 2007.

Third, a federal fund to pay for natural catastrophes isn't looking likely. There's just not enough support for it.

"In 2004, four storms crushed Florida," says industry observer Brian Sullivan, editor of Auto Insurance Report and Property Insurance Report. "In 2005, two huge hurricanes hit the Gulf. One Florida homeowners company went under. Everyone else paid the bills."

Yet the federal catastrophe-fund debate lasted all of about "an hour and a half" after Katrina, says Sullivan. Even among regulators, a consensus for a federal backstop for natural catastrophes is lacking.

"We'd like to see it," says Mississippi Insurance Commissioner George Dale, whose state took a beating in 2005 from Hurricane Katrina. His Utah counterpart, however, "wasn't excited about it," says Dale.

With the knowledge that they won't be able to rely on the federal government to help them pay for damages sustained in the next Hurricane Katrina, perhaps it's no surprise that reservations can be heard from insurance leaders, like Schiro; Martin J. Sullivan, CEO of American International Group Inc.; Jeffrey A. Ludrof, president and CEO of Erie Insurance Group; and Paula Rosput Reynolds, president and CEO of Seattle-based property/casualty carrier Safeco Corp.

PRICES HOLD STEADY

Still, for now, it looks like the bulk of commercial property/casualty insurance buyers will be able to go into C-suite budget meetings with good news. "Pricing will be flat in the commercial market," says Gelb. "Risk managers can expect a stable market.

" Workers' comp prices are softening, and profitability in that business line will be the lowest in years, says Matthew Mosher, group vice president of global property/casualty ratings at A.M. Best Co. Inc.

Even the scandals surrounding the backdating of stock options don't appear to have affected prices in directors' and officers' insurance lines. Gelb, citing a study by Willis Group Holdings, said the options scandal could be a $500 million to $1 billion issue for the industry. "Not helpful-- but it doesn't seem to be a major barn burner," he says.

"It appears to be a manageable issue at the present time," says Sullivan of AIG. "Most (backdating-options scandals) are in the derivative arena where they've historically been easier and cheaper to settle than class action."

Perhaps because most buyers are facing stable rates, pricing is not always the first item on their agenda, says Brian M. Storms, chairman and CEO of insurance broker Marsh Inc., which is recovering from a price-gouging scandal. Buyers instead appear to be more concerned with service.

"Clients are enjoying a preferable rate environment right now," says Storms. "But they are more interested in financial strength of companies we represent. There's the speed of paying claims. Clients are not homogenous. There are the renewal decisions. There's lot more to do than just the rate."

Indeed. What's in it for buyers if they get a great rate with a carrier that goes bankrupt two years down the road?

"Frequencies as a rule are falling, and severity is pretty benign," says William J. Mullaney, president of MetLife Auto & Home, the personal and casualty lines subsidiary of MetLife. In the next 12 to 18 months, he predicts "selective price cutting where companies want to grow." That's good news for buyers, as price cuts mean premiums are likely to drop.

The senior insurance executives, who spoke at the annual gathering of the Joint Industry Forum in New York in January, were also quick to remind their audience that they would continue the underwriting discipline that has helped turn 2006 into a memorable year.

While the 2006 hurricane season turned out to be a dud, and a boon to carriers' bottom lines, the tame season will not have much of an effect on the actuarial climate outlooks. Actuaries tend to set their prices over information gleaned over 20, 30 and even 40 years' worth of data. That data is showing a warming trend with increasing hurricane severity.

"We are in a period of heightened global warming," says Pierre L. Ozendo, head of property/casualty reinsurance for Swiss Re. Schiro of Zurich Financial points to the warm East Coast temperatures recorded in early January.

"All you have to do is look at last Saturday (Jan. 6) in New York," he says. "It was more than 70 degrees."

As a result, buyers of catastrophe coverage are not likely to get a break, and insurance executives say commercial and retail insurance buyers need to accept the risk of living in catastrophe-prone areas.

The more an insurance company or broker can explain the risks to buyers, the more wisely they are to allocate insurance dollars. Storms says one of the strategies his firm has taken is to explain to clients how to mitigate risk.

"We're spending a lot of time with clients helping them mitigate the risk before it becomes an event," says Storms. "C-suites are waking up to it. It matters a great deal long before it becomes an insurance company's problem."

While the executives talked about the importance of sharing the risk burden, the irony is that buyers don't seem to be in any mood to subsidize peers in catastrophe-prone areas.

"They are concerned that they've chosen to live out of harm's way but are supporting federal programs for folks in harm's way," says Ludrof, who leads an Erie, Pa.-based regional insurer. Located in western Pennsylvania, Erie Insurance and its clients don't face the natural catastrophe risks that companies and homeowners on the Gulf Coast do.

CYRIL TUOHY is managing editor of Risk & Insurance®.

February 1, 2007

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