2018 Insurance market outlook
The insurance industry today Table 1 shows that from 2008 to 2012, the industry’s “Return on Aver- age Net Worth” was poor. This was attributable to a lousy combined ratio and a low level of investment return (the majority of an insurance company’s portfolio is invested in debt obligations; they can only in- vest about 20 percent in equities). The industry needs to attract capital (surplus) to continue to grow. In order to do that, it needs to earn 10 percent or more in returns. When returns deteriorate like they did from 2008 to 2012, underwriters try to get more rate (increase premiums). This is reflected in the rate in- creases illustrated in Figure 1. In 2013, 2014, and 2015, the industry performed well, but not great. Insurers earned modest underwriting profits but decent overall returns. Rates in these years were flat and started trending down. This decrease in pricing adversely affected 2016 results. Insurance companies basi- cally broke even on underwriting (combined ratio of 100.7 percent) and overall returns dropped from 8.4 percent to 6.2 percent — a 26 percent drop. The first six months of 2017 continued the downward trend. The in- dustry recently posted a $5.1 billion underwriting loss for the first six months of 2017 compared with a $2 billion loss in the same period last year. Net income year-over-year fell to $15.4 billion from $21.6 billion in 2016. The industry will be further impacted by the devastating effects of the recent hurricanes. Hurricanes Harvey and Irma promise to be among the worst national disasters to ever hit mankind, second only to Katrina, and it is estimated that total damages could be as high as $100 billion.
What changes in premiums should engineering firms expect? By Jeff Cavignac, CPCU, RPLU, ARM; James P. Schabarum II, CPCU, AFSB; Patrick Casinelli, RHU, REBC, CHRS; and Matt Noonan, CIC, RHU, CHRS, CCWS
For many companies, insurance is one of the largest costs. When you add up premiums for Property, General Liability, Auto, Workers’ Compensation, Employee Benefits, Life Insurance and other lines of coverage, it can often total 5 percent of revenues or more. And that is only the direct costs. If you factor in the indirect costs, this number can more than double. Due to the magnitude of these costs, it is critical to understand not only how to manage them proactively, but also how to forecast your costs as you look ahead to your next fiscal year. In the long run, the only way to lower the cost of risk is to lower the frequency and severity of claims that drive the premiums as well as the indirect costs. In the near and intermediate future, however, you will also be affected by the insurance marketplace. This article provides some perspective on where the insurance industry is today and how the industry’s current finances and underwriting objectives might affect your business in 2018.
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csengineermag.com
january 2018
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