Companies in the captive category are streets ahead in terms of profitability. The average return on equity by the six companies in this category was 46% last year. (Return on equity is an accounting ratio which measures a company's overall profitability. This return figure includes unrealised gains from investments.)

The category also reflects the highest underwriting profits. In DCR's view, this is because the premiums charged may be disproportional to the risks assumed in certain instances.

Not far behind in terms of profits are the companies in the specialist category. The average return on equity by the six companies was 39% last year - but this figure hides some super performances.

Auto & General and Hollard, for instance, reflected a return on equity of 34% and 48% respectively, based on last year's published profits. However, on closer scrutiny it appears these companies could be operating even more profitably.

DCR felt it was appropriate to recalculate their published profits by excluding the reinsurance payments they made to foreign companies because, for a number of years, no benefits had been received in return. On this basis, the companies reflected a return on equity of 61% and 62% respectively.

Louis Fin, deputy MD of Auto & General, comments on DCR's recalculation: "The cost of capping possible losses is 18% which, if added back in terms of DCR's interpretation, would artificially increase the return on equity from 34% to 52% (not 61% as quoted above)."

Hollard Insurance MD Miles Japhet also disagrees with the recalculation, saying: "To treat catastrophe reinsurance premiums as if they were income implies that one had the opportunity to foresee that no catastrophes would arise in the year ahead."

Companies in the traditional multiline category were less profitable than their counterparts, rendering an average return, excluding unrealised investment gains, of 11%. Once investment gains are included, though, the average rises to 24%.

The accompanying table shows the overall profitability of some major players in the industry. The first column shows their growth in gross premium income for 1995 and last year. The second column measures their return on equity based on underwriting profits and realised investment gains, expressed as a percentage of average shareholders equity. The third column shows return on equity including unrealised investment gains.

DCR considers this last column to be the most appropriate profit measure because a short-term insurer's success depends on both its underwriting and total investment performance.

Japhet says in defence of the insurance industry that with the benefit of hindsight, the industry did overreact to a negative trend in previous years, "fuelled by uncertainties around the growth in crime after the 1994 elections". Many companies are responding to past gains by decreasing their premiums this year, he said.

On the industry solvency front, DCR concluded that the short-term credit outlook for the industry was generally positive, but the medium-term prospects are more uncertain because of the likelihood of the increased competition from foreign insurers, direct sellers and non-insurers like banks and retailers.

DCR director, Dave King, says that companies will in future be forced to contain claim costs more pro-actively to avoid being financially vulnerable, especially if they have high infrastructure costs.

And what does all this mean for hard-hit policyholders?

A good chance of paying lower premiums, if not this year, then certainly next year.

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