The Competitiveness of the Property- Casualty Insurance Industry: A Look at Market Equity Values and Premium Prices

Abstract

The insurance "liability crisis" has led to a debate over whether the recent dramatic increases in commercial liability insurance premiums represent an attempt by insurance firms to fix prices above market levels to recover past pricing mistakes or, rather, an attempt to price insurance at a level commensurate with expected cash flows. A search for the underlying causes of the crisis has led to an examination of the financial health of the industry. The property-casualty insurance industry claims that the increases in premiums are a direct result of the dramatic increases in current and expected future corporate liability exposure. Consumer and trial lawyer groups argue that the crisis has been manufactured by collusion within the property-casualty insurance industry, resulting in price gouging by property-casualty insurance firms. These analysts generally measure the financial performance of the property-casualty insurance industry in terms of the profitability of firms in the industry. By focusing on profitability, however, participants in the debate have failed to recognize that profitability itself has inherent shortcomings as a measure of industry performance.