P/C Insurers Face Obstacles on Road to Hard Market

With interest rates low and looking like they will stay low for some time, property/casualty insurance companies will have to focus on making their profit on underwriting rather than on investments.

However, P/C insurers expecting to achieve better results by relying chiefly on higher prices may need a Plan B.

There are numerous forces inhibiting the broad price increases that might usher in a real hard market, according to experts at the Professional Liability Underwriting Society (PLUS) Directors & Officers Symposium.

These forces include buyers who balk at paying more, brokers unaccustomed to asking for more, along with benign loss trends that make increases difficult to explain.

Will Customers Pay?

The willingness, or unwillingness, of customers to pay more is a key factor in whether insurers can raise prices, according to Eric Andersen, CEO of Aon Risk Solutions Americas, part of Aon Corp. He said most buyers “are not budgeting for increases.”

“The market psyche right now is that when you get down to the level of a business deal, the pricing differential between new and renewal matters,” Andersen said.

Also, the transparency of data today makes it difficult for insurers to spread the effect of losses from one product line to another. Andersen said risk managers are more aware of what causes rates to spike in their line, and what doesn’t. U.S. customers are not willing to pay for Thailand flood losses, for example.

Being strongly-rated does not give a carrier a pass to higher pricing either, he added.

Continuing price competition and a slow economy are additional factors. “There is a firming of prices but there is a lot of activity chasing a static population,” Andersen said.

Michael Sapnar, president and CEO, Transatlantic Holdings, agreed that competition remains a factor, and there are a number of insurance markets going after a marketplace that isn’t growing.

Sapnar said brokers have a lot of influence over what happens in pricing. However, some question whether brokers are willing to ask customers to pay more.

David McElroy, president, financial and professional products at Arch Insurance, said the three largest brokers need to be convinced to ask for rate increases.

McElroy said it is difficult to articulate why insurers need higher rates, especially when loss cost trends are not rising. “We don’t lay that out. It takes guts.”

Brokers may also be out of practice. “It’s hard to ask for rate hikes if you’ve never had to do it,” said Sapnar, referring to the fact the market has been soft for an extended period.

Sapnar also said brokers have to prepare their clients and get risk managers to budget for increases.

Andersen said that roles get clarified in a hard market. When prices are going down, “being a broker is easy,” he said. But when prices are going up, a broker is more clearly working for the client.

“If customers will accept price increases, then brokers should push for them,” said Jay Gelb, citing workers’ compensation as one line in need of higher rates. Gelb is managing director and senior equities analyst at Barclays Capital, and follows insurance.

Some Upward Movement

The experts agreed there is some upward pricing movement, especially in property and workers’ compensation. But they disagreed as to whether low interest rates are the reason some insurance prices are increasing.

P/C insurance analyst Brian Meredith, managing director at UBS Securities, credited current price increases in part to low interest rates. Because the Federal Reserve has said interest rates will be low until at least 2014, “companies realize they have to do something and can’t rely on investments.”

Meredith added he does not see significant price increases that would herald a real hard market because loss trends are benign.

But McElroy said low interest rates do not affect pricing. “At underwriting level, nobody cares what interest rates are,” he said. Carriers may need a combined ratio of 87 or 88 percent to make it in this market, but they do not communicate that to underwriters, he said, calling this a “disconnect.”

Gelb said that while low interest rates may not directly drive pricing, they do influence insurer strategy. For every one-point decrease in its investment portfolio, an insurer needs two points better in its combined ratio, according to Gelb.

Sapnar said it will take some insolvencies before there is a hard market. He said that the European debt crisis could help trigger a hard market, but that it is “never just one event.”

Meredith concurred that it would take some insolvencies for the market to harden significantly.

Sapnar said not to expect reinsurers to drive a hard market. Reinsurers, he said, do not have the capital or influence they previously had. “The days of the tail wagging the dog are gone,” he said.

The industry should not be wishing for a sudden hard market anyway, according to Gelb. “Slow, steady is better,” he said.

Hopes for Better Economy

Rather than relying on pricing or a series of seismic events, insurers may just have to pin their hopes on growth in the economy.

“We are completely tethered to the economy,” McElroy said. “Growth depends on what the economy does going forward.”

“GDP drives growth,” Gelb said, indicating he expects growth of plus one or two points on top of the GDP for the industry.

Andersen said growth would eventually come from new products, customers expanding, mergers, even regulatory issues that create liabilities. He sees growth in Latin America, in affinity programs and in the employee benefits area.

There is one other factor that could drive growth: risk.

“The perception of risk in the world affects growth — the more risk, the more need for insurance products,” Meredith said.

In Andersen’s view, long-term dynamics are positive. “Customer need around complex risks, the need for insurance, has never been greater,” he said. But right now, “people are just now sticking their heads out of the foxhole and looking around.”