‘Round and ‘Round the Cycle Goes, Where it Stops Nobody Knows
Like the wheels of Lance Armstrong’s bike—a blur of perpetual motion as he powered up mountain after mountain in the Tour de France—the non-stop cycle of the property/casualty insurance market continues on its seemingly endless rotation between hard and soft market pricing, albeit not nearly as quickly.
Despite pleas from various insurance industry gurus for “underwriting discipline” to prevail unabated pricing is softening, at least according to mid-year reports from a number of industry watchers. However, judging from comments posted recently on Insurance Journal’s Web site (www.insurancejournal.com), not everyone is seeing evidence of lower rates.
At the Mid-Year Property/Casualty Symposium held by the Insurance Council of Texas and the Association of Fire and Casualty in Texas on July 15, the Insurance Information Institute’s Dr. Robert Hartwig warned attendees that while the industry experienced a $30 billion profit in 2003, not everything is peachy keen.
Comparing the recent hard market to those of the ’70s and ’80s Hartwig said, “We did not reach the peaks in terms of premium growth that we had previously. In other words this hard market seems to be somewhat cut short.”
He added that the trend in premium growth is downward this year, noting that for the first quarter premium growth fell to around 5 percent, compared with a 9.8 percent growth in premium for all of 2003.
“My prediction is that by the end of the year we will hit the first negative real premium growth in this business since 1999,” he said. “… Unless your loss costs are dropping like a stone, that means the seeds of the industry’s own destruction are being sown at this moment.”
Hartwig reminded insurers that, “charging the appropriate premium makes every bit of difference to the bottom line.”
In a recent study of the reinsurance industry, A.M. Best (www.ambest.com) reported that through the rest of 2004 and 2005 a softer market, led by the property sector, will likely develop. Best said property premium rates peaked and began to fall during 2003.
The Council of Insurance Agents & Brokers (www.ciab.
com) stated in a recent bulletin that its latest commercial market index “showed 35 percent of small accounts, 57 percent of medium accounts and 53 percent of large accounts experienced premium rate decreases ranging from a slight decrease to a drop of as much as 20 percent during the last quarter. Brokers from across the country said most of their commercial accounts held steady or experienced premium decreases during the period.”
According to Ken A. Crerar, president of The Council, “Terms and conditions are still tight, but we are seeing accelerated decreases in premium rates and a return of competition to the market.” Crerar added, “The questions now are how far and how fast will those rates come down.”
A July 2004 announcement released by the Risk and Insurance Management Society Inc. (www.rims.org) indicated a “march toward a soft market” in which “most commercial insurance buyers renewed their policies at the same or lower premiums last quarter.” Data from a survey of corporate risk managers conducted by RIMS “shows that premiums declined by 15 percent on average and as high as 52 percent for up to half of the directors and officers (D&O) liability, property and general liability policies renewed in the second quarter,” the society said.
The RIMS Benchmark Survey covered second quarter renewal information. The announcement said “price declines outpaced price gains in every major category except workers’ compensation. More than 61 percent of D&O liability insurance renewals were either less expensive (16 percent lower on average) or flat compared to last year. More than 65 percent of renewals of domestic property insurance were priced lower (18 percent less on average) or flat. Fifty percent of all workers’ compensation renewals were priced higher (14 percent on average) and 43 percent were priced lower (an average of 13 percent), with the remaining renewals coming in at the same level.”
Industry professionals respond
While the number crunchers may be proclaiming an approaching soft market, some professionals in the field are not seeing much of a change, as evidenced by the following comments made in response to various postings on IJ Online.
“Where is their data coming from?” one agent asked. “I am still seeing increases in commercial rates and premiums. Yes, competition seems to have opened up some—but what about the “hot spots,” DC, NY, TX, LA, etc.? Markets are very restrictive and most carriers [are] unwilling to offer coverage due to “capacity.”
Another wrote: “Insurance is too important to risk the entire industry for the sake of luring in investors who just want to make a quick buck. Give me 7 percent [increases] a year with steady growth and a decent underwriting profit each year instead of 20 percent with huge market swings in pricing and underwriting results that stink any day.”
A marketing rep for a small upstate New York regional carrier stated: “We write small commercial lines that are tough to place (rest, tavern, rental dwellings, artisan contractors). I see the market for our accounts as still very hard. The national stock carriers don’t want small commercial, the regionals are slowing as they have been gaining much market share in the past several years due to the stock carrier’s retreating, and many of the small domestic mutuals are struggling with growth or profitability issues.”
Another agent wishes “we were seeing price reductions, but from my accounts a 10 percent increase on renewals is still doing well. If the market is softening, I wish our carriers would let us in on the secret.”
So the debate goes on, is it the end of the hard market, beginning of a soft market, or is the cycle on hold for a while?
One thing can be stated for sure: Armstrong is one remarkable athlete.