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P/C insurers likely to tighten underwriting: Best

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Lower investment income likely will prompt the U.S. property/casualty industry to focus on underwriting discipline to improve results following the financial crisis, according to A.M. Best Co. Inc.

Although the industry’s relatively conservative investment strategy helped most insurers avoid devastating damage during the financial crisis, capital market conditions pushed insurers to invest operating cash flows even more conservatively in 2009, Best said in a report. The Oldwick, N.J.-based rating agency said companies primarily allocated their assets to cash, short-term investments and Treasury securities.

The shift, as well as lower bond yields, resulted in net investment declines in the first half of 2009 compared with the same period in 2008, Best said.

Despite recent improvements in the capital markets, Best said decreased investment income—whether via lower but risk-free interest rates, reduced dividend income or deliberate ‘derisking’ of fixed-income investments—will continue to challenge insurers’ operating results.

“To the extent that insurers anticipate lower yields from investments, they must determine whether they can withstand a period of diminished overall returns or must act to maintain returns by looking to improve underwriting results,” the report said.

A shift towards tighter underwriting—combined with improved expense management and price increases—would help insurers improve their combined ratio, the report said.

However, Best said it expects the industry to face challenges in these efforts, given the highly competitive market, increased industry capitalization and ongoing recessionary pressures on policyholders. In addition, expected declines in premium volumes further underscore the need for improved underwriting, the report said.

The report, “Changes in Investment Climate Turn Focus to Underwriting,” can be purchased at www.ambest.com.