Fitch Ratings says the U.S. property and casualty insurance industry will need to produce a combined ratio of about 95.5% in 2008 in order to meet the goal of an 11% return on surplus.
Fitch made this observation in a report outlining the rating agency's five-factor model for determining return on surplus. The five factors in the forecasting model include:
• combined ratio (underwriting losses + expenses)/net premium;
• investment yield (investment income/invested assets);
• operating leverage (net premium/surplus);
• asset leverage (invested assets/surplus); and
• tax rates (the level at which pre-tax income is taxed).
For the purpose of forecasting into 2008, the ratings agency assumed operating leverage to be 0.8x, asset leverage to be 2.4x and a tax rate at the long-term average effective rate of 23%.