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Down So Long, Looks Like A Sea Change For Insurers

Finance: Insurance


For almost as long as insurance executives can remember, the $250 billion property and casualty industry has been locked into recurring--and perverse--cycles. The spells when the world gets a brief respite from calamities--floods, earthquakes, riots, hurricanes--are often tough times for P&C insurers. Low losses make for fat surpluses, which in turn create intense competition and falling rates. On the other hand, when mankind is beset by disasters, losses drain capital from the industry, prices stiffen, and returns rise. "We're a strange business," says ITT Hartford Vice-President John Donahue. "If you give us a catastrophe, our stock will probably go up."

But things don't seem to be working that way anymore. Since 1991, the industry has weathered more than $40 billion worth of losses, including such catastrophes as Hurricane Andrew in 1992 and the Northridge (Calif.) earthquake in 1994. And over the past 11/2 years, it has been clobbered by a further $40 billion in pretax losses from the rout in the bond market. But despite these hits, the industry remains stuck in a down cycle now entering its eighth year. The protracted slump, marked by intense price competition in commercial accounts, has even led some industry veterans to declare the cycle dead. "There is no longer, in our view, a property and casualty pricing cycle," says Alan Levin, managing director at Standard & Poor's credit-rating agency.

GLUTTED. Why the change? The industry is awash in capital. During the past decade, the surplus available for paying claims and other expenses increased by more than 10% per year, to $176 billion, compared with premium growth that averaged only 8% a year, according to estimates by Bernstein Research.

The glut of capital stems from several sources. One was unusually high prices during the mid-1980s, which attracted both antitrust scrutiny and a surge of eager entrants into the business. Surpluses were also fattened by the bull market in bonds in the early 1990s. All of this has kept the industry's rate of return well below the rest of Corporate America throughout the past decade (chart). "There's more insurers than there are needs in some parts of the country," says George T. Van Gilder, executive vice-president of Chubb Corp.

Don't expect the picture to change any time soon. Total premiums increased a paltry 3.9% in 1994, well below the overall growth in the economy and below 1993's growth level. Business customers are demanding better rates--and getting them. "The whole industry right now is suffering, so the pricing of the really good accounts is getting pretty predatory," says Rupert Willis, vice-president for standard and commercial accounts at Aetna Life & Casualty.

SAFE DRIVING. More than offsetting the impact of catastrophe losses has been a sharp decline in the amounts insurers are paying out in losses on such once-depressed lines as workers' compensation and automobile insurance. Ratios that measure how much insurers pay in any given claims year compared with their total loss estimates fell to a 10-year low in 1993 for workers' comp, while ratios in the commercial auto business dropped by 30% from the mid-1980s to the early 1990s. Workers' comp is benefiting from reforms in state laws and aggressive antifraud campaigns by insurers. And stricter drunk-driving laws, more widespread use of air bags, and a marked decline in the rate of increase in overall medical costs have suddenly made both commercial and personal auto a desirable business. "Auto has been very good for companies," says Charles A. Bryan, director of property and casualty services group at Ernst & Young. "Right now, that remains a very competitive market."

Depressed pricing and weak profits have even led to financial troubles at some P&C insurers. Credit-rating agencies have downgraded several major insurers, such as CIGNA and Aetna. These woes have led many of the wounded into rescues by some well-heeled investors in an acquisitive mood. CNA Financial is buying Continental at well below book value, while Home Holdings is in the middle of a controversial recapitalization proposal from Zurich Insurance in which Home would essentially liquidate a good portion of its business while Zurich picks up the choicer renewals.

Although painful, this bloodletting is just what the industry needs to lift itself out of the doldrums. The more weak players leave the industry, the better it will be for the survivors. Of course, a few more world-class hurricanes wouldn't hurt either.By Tim Smart in Hartford

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