Matt Mosher, senior vice president and chief rating officer at A.M. Best Co., spoke with BestWeek ahead of the Jan. 15 Property/Casualty Joint Insurance Industry Forum in New York. He'll be one of the featured speakers at the forum.
Q: How would you describe the state of the property/casualty market today?
A: I would say that the P/C market today is stable. There are many different issues coming through it, but things have firmed to the point of stable rates. But, profitability still is not at the level that most in the industry would like it to be at. We expect that certainly results should improve in 2013 just with the elimination of a major catastrophe such as Sandy which took a lot of earnings out of the marketplace. But there are still pressures that are there for the industry, such as less adequate loss reserves that they've taken. They still have to deal with the issue of investments and the investment yields that are there. And the returns that come from a combined ratio of say, 102 today, versus the returns that you have gotten 10 years ago from a combined ratio of 102 are much different when you consider the yields that you can earn on your investments.
Q: What do you see as the major issue facing the industry today?
A: The whole issue of loss reserves and adequate loss reserves and the fact that ultimately they're going to dry out. There's a loss level that has to be paid and companies have to maintain that adequate level of loss reserves to pay future claims. So that's going to be a detriment to earnings down the road. They're going to have to price current business at the appropriate levels to maintain the profit levels that they have. And that's going to be pressure because of the investment yields and the low investment yields that they have. They're not going to be able to get the returns that they're looking for. The question will be will regulators allow them to price at that appropriate level.
The other issue that they're going to be looking for is the whole issue of risk management and the ORSA, Own Risk and Solvency Assessment. Companies are going to be pressured to look at risk and determine what their risks are and manage those risks. When you look at what the overall returns are of companies, very often we hear companies say well I only need a 6% return or in some cases, mutuals in tough times might say I don't necessarily need that large of a return. So the question is what's the risk that goes with that return? And I think the ORSA process will force companies to really look at what is the risk that's behind the returns that they have - which isn't necessarily a bad thing. They will have a better understanding of the business and the risks that they're dealing with.