Early Study by III Sees Healthy Underwriting Profits, Zero Growth in 2008

The following is excerpted from a special report performed by the Insurance Information Institute (III) -- an "early-bird" forecast on the state of industry for 2008: 
 
Each year the Insurance Information Institute invites a panel of Wall Street stock analysts and industry professionals to review the prospects for the industry in the year ahead. This year’s survey results indicate that the continuing respite in catastrophe losses in 2007 combined with strong performances in virtually all major lines of property/casualty (P/C) insurance will propel the industry to one of its best underwriting performances in the past 80 years. Analysts expect the industry’s profitability to continue in 2008, albeit with an underwriting performance that will generate a moderately smaller underwriting profit. The poll also shows that analysts uniformly expect premium growth in 2007 to come in below expectations while the outlook for 2008 remains completely flat to slightly negative. This apparent paradox of strong profits but stagnant premium growth is a reminder of the highly cyclical nature of the property/casualty business and the fact that the industry’s financial fortunes are determined by a myriad of factors. 
 
 
Premium Growth: Stuck in Neutral, But Insurance Buyers Benefit & Insurer Margins Remain Healthy 
 
The average forecast calls for negative growth in net written premiums in 2008 of 0.3 percent, a slight deterioration from the zero growth (0.0 percent) estimate for 2007. The 0.3 percent decline in premium growth that analysts project for 2008, if accurate, would represent the first decline in annual premiums since 1943, when premium volume declined by 2.4 percent in the midst of World War II. The zero growth estimate for 2007 is also below the 1.5 percent growth projection in the Earlybird survey in December 2006. Premium growth has decelerated steadily since peaking at 15.3 percent in 2002. This is primarily the result of an across-the-board softening in the personal and commercial lines pricing environment. A weakening economy, leakage of premium to government-operated (re)insurers and strong interest in alternative forms of risk transfer, including various forms of self insurance, captives and catastrophe bonds are also contributing to the slowdown. The major exception to this general trend is hurricane-exposed coastal property insurance coverages, where insurers are seeking to charge premiums that are commensurate with the substantial risks they assume. 
 
It is notable that the premium growth estimate for 2008, though slightly negative, represents a leveling out of growth rather than a continuation of the sharp deceleration trend that began in 2003. This suggests that analysts expect pricing discipline to be a key element in the complex dynamics at work in insurance markets in 2008. Historically, the travel time from the cyclical peak of premium growth to the cyclical trough has been 5 to 6 years. Reaching a trough in 2008 would be consistent with historical experience. However, history paints two distinctly different pictures for the years immediately following a trough. During the hard market of the mid-1970s, premium growth peaked in 1975, hit a trough in 1981 and peaked once again in 1985/86. The next trough was effectively reached by 1992, after which the industry experienced very slow growth through the remainder of the decade as illustrated in the chart below.  
 
Buyers of insurance are, of course, the clear winners when it comes to reaping the benefits of slowing premium growth. Drivers, homeowners and businesses in most parts of the United States will be left with more cash in their pockets as insurance costs fall in absolute terms, or at least relative to income growth and growth in GDP. The bottom line is that flat or falling insurance prices are lowering the cost of doing business, driving a car or owning a home