Insurance Cycle Table
$ in Billions
Description
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net Written Premium
$440.60 $434.90 $418.40 $423.80 $438.0 $456.90 $477.7
$487.6
$505.8 $523.5
Combined Ratio
95.5
105
101
102.4
108.1
103.2
96.1
97.0
97.8
100.7
Investment Income
$55.1
$51.5
$47.1
$47.6
$49.1
$48.0
$47.4
$46.2
47.2
46.3
Operating Income
$73.4
$30.6
$45.0
$38.2
$15.4
$33.3
$64.3
$55.6
57.3
42.6
Policyholder Surplus
$517.90 $457.30 $511.50 $556.90 $553.70 $586.8
$653.3
$674.7
$673.7
700.9
Return on Avg. Net Worth
10.9%
0.1%
5.0%
5.6%
3.0%
5.1%
10.3%
8.4%
8.4%
6.2%
Source: Insurance Information Institute (iii.org)
Table 1: Insurance cycle, 2007-2016
Insured losses could range from $30 billion to $40 billion, although it is too early to have a precise amount. To put this in perspective, Katrina cost about $176 billion, of which $82 billion was insured. Overall, the Property and Casualty insurance industry remains in pretty good shape and, although it does have its share of challenges, we are still projecting flat renewal rates with modest rate relief for preferred accounts. This, of course, will vary by line of coverage. Allied Lines includes Property, General Liability, Auto, and Umbrella. With the exception of Auto premiums, these lines should stay rela- tively flat. That does not mean that underwriters will not seek modest rate increases — they will. However, in most cases, rate increases can be negotiated. Auto is the exception. Auto experience has deteriorated recently, and it is estimated that State Farm lost more than $7 billion on its auto book in 2016! The deteriorating results are attributable to increased claims frequency (distracted driving) and increased severity. The increased severity is driven (no pun intended) by higher medical costs, which affect bodily injury claims and higher physical damage costs to repair damaged vehicles. The cost to fix a sensor- and camera-laden bumper today is a lot more than it cost to just replace the bumper 10 years ago. On top of that, it is estimated that more than 500,000 vehicles have been de- stroyed by Hurricane Harvey alone, and flood damage is not excluded on most auto policies. Professional Liability (Errors & Omissions) insurance The market for architects, engineers, lawyers, CPAs, and other pro- fessionals remains competitive, with a large number of companies competing for preferred accounts. Every policy written for this line is tailored by the insurance company providing the coverage. In addi- tion to coverage, the type of risk management resources offered and the quality of the claims handling differs greatly between insurance companies. Moreover, some of the “opportunistic” new players in this market may not be around in five years. Insurance is not a commodity and it is imperative that coverage, risk management, and claims be considered in addition to price. Like Allied Lines, preferred Professional Liability risk professions
should be able to negotiate renewal terms that are flat to minus 5 per- cent from expiring rates. If you operate in what is considered a higher risk profession, such as geotechnical engineering, or attorneys special- izing in class action cases, or if you have adverse loss experience, the market is much narrower. It is suggested that your terms be negotiated early and your program marketed, if necessary. Executive Risk Executive Risk includes Directors & Officers (D&O) Liability, Em- ployment Practices Liability (EPL), and Fiduciary Liability. The head- ache from the last economic downturn appears to be waning and these lines of coverage are reasonably competitive. Every form is different and there are a number of new players who may not be around in five years. On average, we are expecting flat renewal terms with some op- portunities for rate relief. Workers’ Compensation Workers’ Compensation experience in California has improved signifi- cantly since 2011 and rates on average have dropped 15 percent since the first half of 2015. The rate reductions are even more impressive when you look back to 2003 when the Average Charged Rate (ACR) was $6.29, as shown in Figure 2. Through the first six months of 2017, the ACR in California is $2.58 — nearly a 60 percent decrease! Since 2013, combined ratios for this line of coverage have been positive (under 100 percent) but losses are trending up and 2017 is likely to come in close to 100 percent. Despite this, rates have continued to trend downward. This, however, could change. The Workers’ Compensation Insurance Rating Bureau (WCIRB) pro- poses Pure Premium Rates that are approved by the Insurance Com- missioner. Every insurer then publishes its own rates. It is the aver- age charged by all the insurers in the state that make up the Average Charged Rate. The WCIRB submitted its Jan. 1, 2018, pure premium rate filing to the California Department of Insurance proposing advisory pure premium rates that average $1.96 per $100 of payroll. This is slightly less than the current recommended pure premium rate of $2.00. The proposed decrease follows five consecutive advisory pure premium rate decreas- es since early 2015 that have totaled more than 27 percent.
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january 2018
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