Insurance market will soften in 2005

Property and casualty insurance rates will decrease in 2005, according to Tony Warren, president and chief executive officer of West Bend Mutual Insurance Co.
Insurance companies have profited from rising rates during the last four years, and now the property and casualty insurance market is softening as those firms compete for more marketshare, which will drive rates down.
The rates for all lines of property and casualty insurance will decrease by about four to six percent, Warren said.
"There will be a reduction," he said. "I don’t think it will be a dramatic reduction."
That’s good news for businesses that purchase property and casualty insurance coverage, but it will present a challenge for insurance companies, Warren said.
Property and casualty insurance rates remained low for 15 years during a soft market period for the industry in the 1980s and 90s until 2001. Rates have risen each year since then, but are on their way back down this year, Warren said.
Strong performance by the stock market in the 1980s and 90s enabled insurance companies to keep their rates so low, he said. The low rates resulted in the property and casualty insurance industry losing money on its main business function, underwriting insurance, from 1978 until 2001, Warren said. During that time period, the insurance companies made money on investments and capital gains.
The increase in insurance rates, which began at the same time the stock market tanked in 2001, was necessary for the industry, Warren said.
"That’s restored some element of profit to the (core) business," he said.
Some insurance companies went out of business during the soft market years, making it easier to raise rates in the last few years, Warren said. In 1975, there were 33 companies writing large risk and multi-national accounts. In 2003, there were only 12 such firms, Warren said.
The industry would have turned a profit from an underwriting standpoint in 2004 if not for a rash of natural disasters, including several hurricanes that hit Florida, an earthquake in Japan and the tsunami in south Asia, Warren said.
However, the tsunami will have a small impact on the insurance industry because there is a lack of an insurance structure in that part of the world, he said.
Smaller regional insurance companies such as West Bend Mutual had a big year in 2004. West Bend Mutual posted $620 million in revenues. However, it will be difficult to match those profits in 2005, and Warren doesn’t expect his firm to do so.
"We have just finished the best year we have ever had," he said. "Our growth (in 2005) will be very modest, about 6.5 percent. Last year, we grew 9.5 percent."
With insurance rates on the decline, 2005 will be a challenging year for insurance companies, Warren said. While rates are going down, medical costs and legal costs are rising, making it more difficult for insurance companies to make money on their primary business function.
"Our loss costs are not being softened," Warren said.
The insurance industry will see more mergers and acquisitions in 2005, Warren predicts. The most notable industry merger completed in 2004 involved St. Paul, Minn.-based St. Paul Cos. and Hartford, Conn.-based Travelers Property Casualty Corp., but don’t expect any others of that size this year, he said.
"Most of the acquisitions will be small pieces of bigger companies," Warren said.
Property and casualty insurance companies that serve the Midwest have benefited from decent weather in recent years, Warren said.
"Wind and hail are our biggest issues," Warren said. "Wind can be very broad in its nature."
Midwestern insurance companies will hope the weather continues to cooperate in 2005, and their customers will hope the rate reductions last for awhile. It remains to be seen how long property and casualty insurance rates will decline this time.
"Our industry goes through cycles," Warren said. "The last soft market lasted 15 years. Who knows how long this one will be?"
January 21, 2005, Small Business Times, Milwaukee, WI