Magazine article Risk Management

An Actuarial Perspective: Insurance Industry Pricing and Reserving through 2000

Magazine article Risk Management

An Actuarial Perspective: Insurance Industry Pricing and Reserving through 2000

Article excerpt

The intense price competition that characterizes today's commercial insurance marketplace is likely to remain in place until late in 1999, and the next three years will produce continuing changes and challenges for insurers. This article presents an actuarial perspective of current insurance industry pricing and reserving, and the probable changes we can expect.

The 50 years' combined insurance company and brokerage experience of the authors, in conjunction with industry data and interviews conducted with insurance company actuaries, forms the basis for our analysis and predictions. This discussion has a broad industry focus, and does not analyze or predict the actions of any individual companies. Unless otherwise stated, the data presented is on a calendar-year annual statement basis.

As the insurance industry enters 1998, intense price competition is being driven by a number of factors including: financial strength and excess capacity; new competitors; consolidation; a fight to retain market share; and the recent profitability of workers' compensation and private passenger auto coverages. When the Insurance Services Office (ISO) and the Insurance Information Institute (III) analyzed industry results for the first quarter of 1997, they found the results favorable for two primary reasons: investment income and a lack of severe catastrophes.

The financial strength and excess capacity of the insurance industry have been the subject of a number of articles in trade publications. Six out of the seven insurance company actuaries we surveyed say that these are two of the most important factors driving competition today.

New competitors are another force driving current price competition. These are not necessarily new companies, but may be carriers broadening their marketing efforts into new geographical areas, or entering or expanding lines of business in which they previously have had limited activity. Such expansion can be seen in the companies contesting for workers' compensation business; witness the competition between Liberty Mutual and AIG for control and ownership of Golden Eagle in California.

A lack of catastrophes has also bolstered the financial strength of the industry. We are not talking about the number of catastrophes, but rather their severity. There have been no losses approaching the magnitude of Piper Alpha or Hurricane Andrew recently.

Consolidation has been, and will continue to be, an important issue during the next few years. The main impetus for consolidation is to reduce expenses and increase operating efficiencies, which should allow companies to increase their premium writings.

Market share retention efforts are also increasing competition, especially in lines of coverage viewed as profitable at this point in the underwriting/pricing cycle. The majority of insurance company actuaries surveyed indicate their employers intend to increase writings in key markets.

Workers' compensation and personal automobile are two examples. Medical cost and wage inflation have subsided, and improved loss control and fraud detection for workers' compensation have improved results significantly. Personal auto rates have also remained strong. The improved results in both lines have increased the surplus of many companies and are inspiring increased competition.

Sources of Strength

The following discussion, and the accompanying exhibits, illustrate the factors contributing to the insurance industry's financial condition and explore the effects on carriers and insurance pricing that risk managers are likely to see as the next century arrives.

Premium sources -- Exhibit 1 shows that 50 percent of the earned premiums in the property/casualty industry come from workers' compensation and private passenger auto. Note that major insurance companies often thought of as commercial lines carriers have large books of private passenger automobile in addition to commercial lines. …

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