Tuesday, February 6, 2007

Joe Paduda Reflects on Today's Great Times in the Casualty Insruance Business

Joe Paduda may well be the smartest observer of the casualty insurance business--particularly the workers compensation sector.

He recently had the following post on his bog, Managed Care Matters:

Happy Days are Here Again

Seventy years. That's how long its been since the P&C insurance industry enjoyed profit levels like today's. The Dust Bowl was in full blow, there was no TV, half the people worked on farms, and Roosevelt II was just getting started.

The good old days are back.

Here are the numbers. The combined ratio for 2006 is projected to come in at 93.2, a 23 point improvement since the dark days of 2001; a striking turnaround. The combined ratio results make this one of those unusual periods when the return on investment in the P&C sector rivals other industries, an event that does not happen very often.

While profits are at record levels, premium growth is stagnant, with many lines of coverage seeing flat-to-declining renewal rates. That is an inevitable response to the favorable market conditions, as insurers are seeing relatively low losses and solid investment returns, making the insurance business a great place to invest excess funds. When, not if, but when claims results turn negative, expect to see the fair-weather funds fly off to greener pastures. If they're not gone, swept away by a catastrophic weather event or other disaster.

The problem with the insurance industry at times like these is the very short memory, nee ignorance, exhibited by recent entrants. The folks who are just jumping into the market see the returns and the tax and other advantages, and don't pay near enough attention to the reason they are getting those great returns - their capital is pledged to rebuild and repair.

But for now, enjoy!


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