The Hard Market’s Over … Or Is It’
Although I’ve been around the specialty industry for more years than I care to reveal (this information is in poor taste, akin to discussing a woman’s age), and now have seen multiple hard and soft markets, I’m confused.
Why such confusion? After reading tea leaves, consulting the psychic hotline, chanting various incantations, turning to the east, and reading far too many fortune cookies, no deeper understanding appeared, so I turned to two recent industry meetings for answers. Note that my feeble-eyed focus is on the directors and officers (D&O), errors and omissions (E&O) and employment practices liability (EPLI) lines—I can’t go any further than trifocals!
In early February, the National Association of Surplus Lines Offices (NAPSLO) hosted its Mid-Year Educational Workshop in Scottsdale. (I’m not quite sure how February is “mid-year;” this may provide some insight on how the insurance industry can look at data which seems readily understandable and arrive at conclusions which bear no relation to the data!) The sun shone brightly among the canyons and cactus while surplus lines professionals discussed the state of the market, and particularly focused on the now extremely difficult insurance agents errors and omissions market. Some commercial insureds, reeling from the perceived “price gouging” that they’ve suffered over the last few years, can now gloat that their agents and brokers are getting a dose of their own medicine!
Later in the month I roamed the concrete canyons of Manhattan, attending the Professional Liability Underwriting Society’s Directors & Officers Liability Symposium. Although this meeting focuses on the very large publicly held D&O risks, these types of accounts are bellwethers for the future in D&O, and much of what is relevant here eventually permeates down to the smaller private companies.
Surely the talent at these meetings would yield wisdom and help me determine whether the hard market was over. However, the comments offered were no more conclusive than Martha Stewart’s telephone message log.
Surplus lines company executives and wholesalers at NAPSLO responded uniformly with broad smiles when asked about their 2003 results. So that must mean that insurance company stocks are now attractive investments, and as capital flows into the business, pricing will inevitably soften, right?
Well, maybe, according to one Wall Street insurance stock analyst panelist (That rhymes, doesn’t it!). His take was that the pricing cycle has peaked, but no real softening will occur, because the industry’s return on equity is so poor over time that no one wants to invest in insurance stocks. Further insurance company mergers will occur, although according to the panelists the mergers will be done to cover up problems as opposed to adding real capacity or value. Additionally, astute financial managers have replaced the “crazies” at the companies, so they will not follow the pricing spiral downward without discipline. Alright, then, the hard market isn’t over, right?
Just a minute here—over $27 billion—the “b” word, of new capacity entered the marketplace from Bermuda in 2003. Further, the catastrophe market was relatively benign. Shareholders will want that new capital put to work, and with long-tail lines like D&O, E&O and Employment Practices, underwriters get a “free ride” for a few years, until claims begin to mature for those insurers with no legacy experience. Some D&O insurers in New York lamented this new capacity as either naive or unprepared, and told tales of significant price reductions in D&O renewals for public companies in the fourth quarter. So, the soft market is back, huh?
Let’s not get too hasty in telling our insureds we can get it 20 percent cheaper on renewal. The reinsurance market plays an important role in professional lines, and the picture is cloudy at best. Since the 1970s reinsurers have enjoyed only five years with a combined ratio under 100. Historic low interest rates dictate that a reinsurer must underwrite to a 90 to 95 combined ratio. In addition to internal profit pressures, the rating agencies now essentially require that a reinsurer make a profit to maintain its rating. More and more reinsurance is ceded to non-U.S. carriers, and they are increasingly wary of the U.S. legal system. Who wouldn’t be—since 2001 the “tort tax” is estimated to grow over 24 percent to $1,003 per capita by 2005? One of the premier securities plaintiff’s lawyers noted at the D&O Symposium in New York that there are now 75 pending securities cases in the U.S. courts, with damage demands approaching $1 trillion—the “T” word!
So is the hard market over in directors and officers, errors and omissions, and employment practices lines? Since it’s almost Oscar time in Hollywood, we’ll let an Austin film of note describe the situation—and the author—”Dazed and Confused.”
Steve Sprowls, CPCU, RPLU, is President of Professional Lines Underwriting Specialist, Inc. in Austin, a wholesale broker specializing in professional lines such as D&O, E&O and EPLI. He can be reached at (800) 880-1019, email at
steves@prolines.com or on the Web at www.prolines.com.