Thanks to a combination of skill and luck, 2007 was a pretty good year for the U.S. property/casualty insurance business, according to several reports released in recent weeks. The industry is expected to post an underwriting profit for 2007 -- only the third time this has happened since 1978, according to A.M. Best. In addition, the Oldwick, N.J.-based credit rating organization reported that the industry would post a 4.4 percent increase in net income to $49.8 billion, and the all-important combined ratio (ratio of losses and expenses to premiums) was a very good 93.8 for the first nine months of the year.
The luck had to do with a relative dearth of major catastrophes in 2007. The skill part of the equation relates to activities such as effective financial management, astute underwriting practices, and efficient and accurate claims management. Of course, technology plays an increasingly critical role in driving these accomplishments, as a range of tech offerings -- including analytics, rules-based systems, document technologies, business process management/workflow and industry standards -- have transformed the core insurance business functions of underwriting, risk and financial management, and claims adjudication.
That's why it's disturbing to consider other parts of the year-end analyses, which suggest that the industry's current underwriting prowess might not be long-lasting. While extolling the P&C industry's performance, A.M. Best also anticipates that "underwriting results [will] experience a 'modest decline' through 2007 and into 2008 as insurers give way to competitive pressures and begin to exercise less underwriting discipline," according to a December press release. And in his "Earlybird Forecast 2008," Insurance Information Institute (III) president Dr. Robert P. Hartwig noted that "Many industry observers point to the potential loss of pricing and underwriting discipline as their chief concern in 2008 and beyond."
If these predictions come true, it means that a lot of insurers who should know better are ignoring lessons from the banking industry, which cast aside its own technology-enabled best practices in the areas of risk management, underwriting and lending to arrive at the current subprime mortgage meltdown and broader credit crisis and resulting turmoil at some of the financial services industry's most prominent institutions. So far, insurance companies have avoided being soiled by the subprime mess. Let's hope the industry can avoid rationalizing the same kind of irresponsible behavior in the name of competition.
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio