For underwriters, property and liability crisis may be over
The insurance crisis may be over -- at least for insurance companies. It's still hard, expensive, or impossible for many day-care centers, obstetricians, cities and towns, and commercial truckers to get liability insurance. For them, the crisis hasn't ended.
But after more than a year of banging the drum for ``tort reform,'' there has been scarcely a peep of complaint recently from the property/casualty insurance industry.
That may be because the industry is relishing its third consecutive quarter of good profits. After nine quarters of overall losses, the property/casualty insurance business began recovering early this year.
Since raising premiums and rigorously cutting back on the number of high-risk businesses and professions it insures, the industry appears on its way to a highly profitable year.
``It's still a very tight [supply] market,'' says Roger Sacco, an analyst with Value Line Investment Survey. ``The companies are hiking premium rates -- that's what's producing this tremendous cash flow.''
During the first six months of 1986, the industry posted pretax operating earnings of $2 billion. The gain was based on $10.6 billion in net investment income, offsetting an $8.6 billion underwriting loss.
Though industrywide totals for the third quarter are not yet available, a number of companies have begun to report higher profits. Barring some major natural disaster, analysts say, the industry as a whole will record ``excellent profits'' this year.
Among those reporting higher earnings, Firemen's Fund Corporation said last week its third-quarter operating profit more than doubled, to $44.3 million from $19.6 million a year earlier. SAFECO Corporation reported $20.5 million in earnings, as opposed to just $7.3 million a year ago -- a 179 percent rise.
Other corporations, too, were buoyed by their insurance subsidiaries. ITT Corporation said net income rose 64 percent over last year, primarily on the strength of its Hartford Insurance Group subsidiary. Sears, Roebuck & Co. said its earnings rose 25 percent in the quarter, primarily because its Allstate Insurance Group had profits 56 percent higher than the same period last year.
The insurance industry has attributed its financial ``crisis'' to an explosion in litigation and wild jury awards. Thus, the companies have proceeded to limit the availability of insurance, raise its cost, and push for legislative limits on jury damage awards.
Since early this year there has been a general easing of restrictions on availability and even some moderation in premiums as underwriting has become less restrictive while profits have become better.
``We have noticed [premium rates] are quite a bit better now, and some of the biggest reductions have been in states where tort reform legislation has been put into place,'' says Harvey Seymour, a spokesman for the Insurance Information Institute, an industry group.
Critics say the insurance companies themselves are responsible for their own losses.
``It's the cycle of the insurance industry,'' says Robert Hunter, executive director of the National Insurance Consumer Organization. ``With the passage of time and gigantic increases in premiums, we'll see it ease.''
Value Line's Mr. Sacco says that when the economy was good and interest rates high, insurance companies cut premiums to capture more money to invest while interest rates were high. Many companies were not careful in assessing risk vs. cost, and when interest rates fell, investment income did not cover underwriting losses.
``They were underpricing their product to gain market share,'' Sacco says. ``But when interest rates fell they started to get burned.''