E&Y Experts Detail The Outlook For Financial Services

For property-casualty insurers, the “same old story of fixing the hole in the balance sheet remains,” he added.

In actuality, Porrino explained, there are two holes: an “old hole” caused by asbestos and a “new hole” that resulted from “dramatic underpricing in the late 90s.”

On the property-casualty side of the business, surplus shortfalls, caused in part by losses in investments, will continue in 2002, according to Porrino.

If surplus shortfalls continue, so does the question of whether the property-casualty business is really experiencing a hard market.

Porrino said that it is but that the market can become harder. In order to achieve double-digit return on equity, the industrys combined ratio needs to be in the mid-90s, he said. It is moving toward that but not quite there yet, Porrino added.

According to information gathered by E&Y and Goldman Sachs, New York, since mid-1998 commercial line rates have gone from an 8% decline to a 20% increase in the first half of 2002. During that same time frame, flat rates in the personal lines area have increased by 10%.

Volatility in the equity markets is also accelerating consolidation in the asset management sector, Steven Buller, national and international director of asset management services for E&Y explained.

Acquisition activity will be greater among high-net-worth managers and trust companies not only because of the size of the assets under management but also because of the greater ability to leverage sales of other products, he said.

There is also going to be a retrenching of global investments and we are going to lose some of the smaller complexes through 2003, he Buller added.

Fund size has also shrunk with the current market drop. According to Buller, the average asset size for funds has declined to $561 million from $775 million.

Typically, a fund needs $100 million in net assets to break even, he said. Currently, 2,300 funds, or 28% of all funds, have less than $50 million in assets and 3,300 funds, or 40% of all funds, have less than $100 million in assets, Buller said.

Going forward, asset managers are going to rely more on advisors to reach the public, Buller added. Currently, he continued, financial planner, insurance and broker sales make up 85% of all fund sales, he said.

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 11, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.