Ebb and Flow in Property Casualty
27 February 2009
Not that we need any more bad news, but there is a dynamic in the ebb and flow of the property casualty industry that is causing me some concern. That is, all things being equal, the performance of the P&C industry usually lags what is happening in the general economy. This is driven by the timing of policy expirations and, where applicable, audits. Non-auditable guaranteed cost liability and workers compensation policies premiums are based on sales receipts and payrolls at inception. In an economic downturn, they will renew at lower valuations (read price).In the case of auditable policies, the lower than expected sales and payroll levels will result in return premiums. Even if prices increase, spreading existing costs over these lower premiums will increase the expense, and thus the combined, ratio. The loss ratio will also rise as less premium is earned during the new term. It is partly the interplay of these moving parts that CEO Brian Duperreault was referring to recently when he discussed the "invisible hard market" -- higher rates but lower insured exposure value.
This may explain why we are still not seeing a normal rate of IT project expenditure approvals. In conversations these past few weeks, I am hearing that there are lots of inquiries regarding IT system purchases and that vendors have a healthy flow of requests for information, but that only a very few deals are closing. This is after a very slow Q4. Likely, CEOs and CFOs are waiting to get a handle on late summer renewal pricing before releasing any discretionary funds. These indications will not begin to become visible until June.Do not be surprised if the decision rate remains slow until then.