Industry's 'Robust Capital Position' Blamed For Delay In The Turnaround Of Underwriting Cycle.

PositionLOOKING BACK INSURANCE ADVOCATE - 25 YEARS AGO

The insurance industry's robust capital position is delaying a rum in the underwriting cycle, Ira H. Malis, principal at Alex. Brown & Sons Inc. told the Insurance Information Institute's 18th annual research seminar held in New York City.

"There are some similarities to 1984 when the cycle last bottomed out," noted the financial analyst, in a presentation prepared for the seminar. "The industry is paying out more in claims and expenses than it's collecting in premiums. Paid losses are 80 cents for every dollar of premium. That ratio is even worse than in 1984," he said.

The difference between the situation today and in 1984 is the amount of capital in the industry. Malis continued. The amount of business an insurer can write depends on its policyholder surplus. The higher the ratio of premiums to surplus, the greater the risk to the insurer.

"In 1984, the industry was writing $1.86 of business for every dollar it had in capital," Malis said. "In 1992, the worst year for catastrophes, the industry's surplus actually grew by S5 billion. And we're forecasting the 1993 year-end premium-to-surplus ratio will be $1.36 to $1."

Malis pointed out that even though interest rates are lower now, the pain companies are experiencing isn't great enough to trigger a change because of the excess capital.

The cycle will only turn when some event causes a decline in capital, such as a major disaster, a steep drop in the financial markets or a recognition of the shortfall in reserves for claims.

Taking part in the panel discussion on the financial outlook for the insurance industry were Daniel J. Cavanagh, president and CEO of Metropolitan P&C Insurance Co. and William E. Thiele, president and chief operating officer for North American Reinsurance Corporation.

Steven H. Newman, chairman and CEO, Underwriters Re Corporation served as the panel moderator.

An Oversupply?

In comments on the large amount of capital being raised in reinsurance markets, Malis questioned whether the demand for reinsurance would be sufficient to allow the industry to utilize its capital. "The reinsurance sector's surplus stood at $15.2 billion at the end of the first six months of this year," he said.

"If the reinsurance industry had a 1.5 to 1 premium-to-surplus ratio, it would be writing $23 billion in reinsurance business. Where are the primary insurance companies that want to purchase $23 billion of reinsurance?"

Newman suggested that many analysis are making the mistake of...

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