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Business, Industry, and Consumers: Profitability of the Property/Casualty Insurance Industry

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Report Type Reports and Testimonies
Report Date April 28, 1986
Report No. 129726
Subject
Summary:

Testimony was given addressing: (1) the effects of cash flow underwriting on the property/casualty industry's pricing strategies; (2) industry profitability; (3) the cyclical nature of the industry's profitability; (4) the industry's financial outlook; and (5) current difficulties in the industry with medical malpractice and general liability. Property/casualty companies have used a pricing strategy which sacrifices underwriting profit margins in order to generate cash for investment purposes and has resulted in $50 to $75 billion in net gains over the last 10 years. Because of investment gains, a property/casualty company can have a net income even though its premium revenues alone are not enough to cover claims and expenses. Companies have been willing to accept lower premiums for certain insurance lines in order to encourage sales and obtain funds for investment. Even though the industry had $82 billion in investment gains, when offset against its underwriting losses of $45 billion, the result was a net gain of about $37 billion. This is possible because of pricing strategies which generated about $66 billion in net cash flow. Like other businesses, property/casualty underwriting is subject to profitability cycles, which are moving in a positive direction. Available estimates show that, over the next 5 years, the industry expects substantial net gains. Although the financial outlook as a whole appears favorable, the current difficulties in liability insurance are found in the medical malpractice and general liability lines; however, they represent less than 10 percent of the total business. Despite the large proportion of underwriting losses that the two lines represent, GAO found that they could have broken even with smaller increases in premium rates.

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