Profitability in the insurance industry is determined by combining both underwriting results and investment results. Despite incurring substantial underwriting losses over the 10-year period 1976 through 1985, the property/casualty insurance industry has more than offset those aggregate losses with investment gains. The underwriting losses resulted, in part, from the industry’s cash flow underwriting pricing strategy in which companies sacrificed underwriting gains in an attempt to attract more business and thereby enhance investment gains. We estimate that the industry had about $81 billion in after-tax income over this period. Because of the cyclical character of the industry’s underwriting experience, we believe that data covering longer periods, rather than concentrating on the last few years, provide better perspective on the industry’s profitability. (more…)

As noted earlier, one set of our profitability estimates assumed that the industry-established reserves were sufficient to settle future claims. We made this assumption because companies review their reserve estimates at least annually and are bound by state regulators to provide for fully adequate reserves. Future events, however, may show that the reserves are either excessive or inadequate. (more…)