U.S. insurers see tough pricing conditions eroding profit

2/06/2008 - 19:35

NEW YORK (Reuters) - Insurance chiefs see tough times for the industry over the next few years, plagued by softening market conditions eroding profitability, and the difficulty of adapting technology to a constantly changing risk landscape.

Softening policy rates will be the biggest near-term headache for insurers, a panel of insurance executives said at a Standard & Poor's conference in New York on Monday, and could lead to the sector as a whole, pricing policies at rates that will be undercut by eventual claims.

"We have seen price competition far more severe," William Berkley, chairman of U.S. insurer W.R. Berkley Corp , said, adding that his company had seen average pricing fall about 7 percent this year over last year.

Berkley sees the industry, as a whole, breaking even in 2008, but said it could sink into an unprofitable period in 2009, with signs that the cost of claims could outstrip what corporations pay for insurance coverage in the first place.

Insurance rates have been softening over the past three years as benign catastrophe activity and tort reforms have helped lower claims for both property and casualty lines.

Henry Keeling, chief operating officer at XL Capital , a Bermuda insurance and reinsurance company, said XL had also seen a decline of about 7 percent on business from clients renewing policies.

He added that pricing was a more pronounced issue for property-catastrophe lines than casualty lines, or coverage for legal liability for losses stemming from injury or damage to property of others.

"We have not seen wholesale deterioration in terms and conditions (for casualty)," Keeling said.

"I think with commercial (insurance), we are in for another three years of pain," said panelist Frederick Eppinger, chief executive of the Hanover Insurance Group.

Compounding the thorny pricing problem for insurers is making sure one has the necessary tools to assess what should be charged, with the risks of losses in a constant state of flux, in "a world that is changing at an ever increasing pace," Berkley said.

"The challenge that we face is getting better data," he added. "We are really on the horns of that dilemma."

XL's Keeling said the problem with gathering data was even worse in emerging markets, where information is harder to come by.

"You have to have better margins to account for that added risk," said Keeling, of emerging markets business.

Insurers use sophisticated modeling systems to map out various risk scenarios, and the chance of losses, for any single policy. But the models have to be constantly updated to reflect changes in various risks, including harsher weather patterns that are predicted in the coming decades.

According to a recent survey of equity analysts by consultant firm Accenture, natural disasters pose the biggest threat to an insurer's bottom line, outranking investment portfolio risk, or regulatory and geopolitical issues.

Better, more expansive, modeling tools are key to taming the volatility that losses can bring to insurance earnings, said Gail McGiffin, global lead, underwriting for Accenture's insurance practice.

"Many of the modeling tools are single peril -- wind or flood, but not wind and flood," she said, citing one area where modeling tools need to change. "There needs to be progress. As they model for loss and damageability, these models also need to integrate cross perils," McGiffin said in an interview.

(Reporting by Lilla Zuill, editing by Maureen Bavdek)

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