Insurance Machine

According to Michael R. Murray, the Insurance Services Office’s assistant vice president for financial analysis, underwriting expenses, in particular acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, in addition to premium taxes, dropped by 1.6 percent in 2008 to $118.2 billion for property and casualty insurers. This is down from $120.1 billion for the year of 2007.

At the same time, there was a decline in dividends to policyholders last year, which fell $0.5 billion to $2 billion, or 19.9 percent, from $2.4 billion in 2007.
The net loss on underwriting for 2008 of $21.2 billion is 4.8 percent of the $438.1 billion earned for that year in net premiums. Compare this with the $19.3 billion net gain on underwriting for 2007, which reflects just 4.4 percent of the $438.9 billion in net premiums earned during that same year.

The figure for the combined ratio for 2008, which is 105.1 percent constitutes the worst full-year underwriting result ever reported since the 2002 year’s 107.3 percent combined ratio. This combined ratio reported for the year 2008 is one percentage point worse than the annual average for ISO’s annual data reporting since the year of 1959 when reporting started, of a combined ratio of 104 percent points.

David Sampson, Property Casualty Insurers Association of America (PCI) president and chief executive officer says that the current underwriting results were significantly affected by catastrophe losses that were suffered in 2008. He points out that the hurricane season of the previous year created a $14.8 billion increase in net catastrophe losses, bringing them to $21.8 billion. This he adds, explains about a third of the drop in underwriting results. Sampson says that if the net catastrophe losses had stayed the same as they had been for 2007, their actually would have been an increase in the combined ratio by 6.2 percentage points to the 101.7 percent of last year, instead of the jump of 9.6 percentage points that occurred bring the combined ration to 105.1 percent. But, he adds that as horrendous as Hurricanes Gustav and Ike were, the results of advanced computer modeling are indicating that it is simply a matter of time until we are hit with a catastrophe causing as much as a $100 billion or more in insured losses. What this means, according to him, is that everybody in the industry including insurers, regulators, businesses, legislators, and consumers, must immediately take steps so as to reduce and minimize the damage to and negative impact on consumers that will surely occur when the big one hits.

Murray adds that in addition to natural catastrophes, the underwriting results for 2008 were affected by the recession and the economic crisis sweeping through the financial system. The many more the usual foreclosures along with the other credit problems contributed disproportionately to the deteriorating results for mortgage and financial guaranty insurers.