Even Mother Nature couldn’t stop what appear to be the first signs of softening in the commercial and personal lines property-casualty insurance markets. While an unprecedented quarto of hurricanes caused nearly $20 billion in insured losses in the Southeastern United States and took the industry by surprise underwriters’ resolve to price risks competitively was not derailed.
Of course, not all insurance lines spin at the same velocity as the industry’s customary cycle. Directors and officers liability insurance, which experienced massive price upheaval in recent years, seems to be softening faster than other lines due to increased competition and some comfortable room to cut prices. Lagging behind the cycle is the excess and surplus lines market, which firmed in October after some price softening earlier this summer.
Overall, the stricter underwriting that followed the end of the last soft market in late-2000 appears to be moderating. “If you look for clear evidence of when the industry’s cycle begins to weaken, the first thing you see is pricing starting to slip, then coverage terms and conditions liberalizing, followed by deductibles coming down and, before you know it, insurers are hawking extremely competitive three-year policies,” says Karen Horvath, vice president of A.M. Best Co., an Oldwick, N.J.-based insurer rating agency. “We’re right at the top of this now, with pricing starting to weaken.”
The First Signs
October is one of two months in which many mid-size to larger commercial accounts traditionally renew their insurance policies, with April being the other. Not all companies renew during these months, but enough do to gauge a sense of the market’s direction. Paul Major, director of insurance at Metris Companies Inc., a Minnetonka, Minn.-based financial services company, just signed off on a range of renewed policies in October. He agrees with Horvath that bargains in the p-c market were more available than they were last year at this time. “Generally, the market has stabilized for most risks and is actually softening a bit in some, such as D&O, property insurance and errors and omissions coverage,” says Major, formerly a risk manager with United HealthCare.
“We’ve either seen flat pricing or some softness in most of our renewals, being driven in large part by competition,” he adds. “I’m hearing that commercial general liability also has stabilized or is softening, with some reduced rates in the 5% range.”
Horvath says that pricing for D&O insurance has become very competitive. The line is softening by the largest degree, largely because it saw the largest percentage price increases in the post-Enron legal climate, she explains. “Not all companies are paying less than last go-round, but most are, though the percentage decreases vary,” Horvath says. “The reason is that commercial lines, much more so than personal lines or reinsurance, is a very fragmented market, where the pricing changes vary by territory and product. If you’re a large Fortune 500 corporation, D&O is softening to a greater extent than if you were a middle market company.”
Property Prognostications
Horvath says pricing on the property side has softened in part because of softer reinsurance pricing. “The first area in the marketplace that softened was property reinsurance, although the hurricanes are likely to put a damper on that going forward for those insurers and reinsurers most affected,” she notes. “But, in general, we expect continued stabilization on the property side.”
Officials at Standard & Poor’s Insurance Ratings in New York concur. “It is hard to say at this point what impact the hurricanes will have on the property risk side, but there is clearly some competition there and everyone we talk to says margins are still nice on that business,” says John Iten, an S&P directo. “Certainly the middle market and small commercial market are getting more competitive, as some companies begin to focus on these areas exclusively, such as St. Paul Travelers and The Hartford, which are competing more aggressively with regional carriers.”
“It seems to be a reasonably competitive environment,” agrees Steven Dreyer, an S&P practice leader. “I haven’t seen many signs of misbehavior at this time in terms of pricing. That’s partially due to reinsurance pricing, which is widely regarded to have been softening all year. Leaving aside the impact of the hurricanes, the door is open for primary companies to encourage them to be a bit more aggressive in their pricing.”
Dreyer does cite a caveat wrought by the hurricanes: “Our concern in the wake of the hurricanes is that the loss modeling agencies will make some changes in the probable maximum loss estimates in their models, an adjustment in a more conservative direction that might affect insurers’ loss estimates across the board and, therefore, affect their pricing, particularly with respect to homeowners insurance. This would be expected in Florida, but there might be a ripple effect across all lines and geographies.”
Casualty, Personal Lines Weigh In
On the casualty side of the business, Hartwig says the proportion of accounts renewing at lower prices is smaller than on the property side, “but there is still evidence of softening in that market, as well,” he adds. “Whereas four of five buyers on the property side are renewing with negative pricing, less than half are on the casualty side. There are still problems with the court system, in addition to spiraling medical care cost inflation, that continue to affect lines like medical malpractice and workers compensation, limiting insurers’ ability to reduce pricing or reduce it further.”
Personal lines insurance also is experiencing a dose of softening, but not to the degree seen on the commercial lines side. “In my state, New Jersey, I’ve noticed a few companies coming back into the automobile insurance market, making it get a little more competitive,” says Iten. Dreyer comments: “I agree that in the auto market in New Jersey, which is a bellwhether state, prices are more competitive. And if carriers can see a profit in New Jersey, they can seem them anywhere. As for the rest of personal lines, there are variations, with states like Florida and other southern expected to receive some real price upheaval in homeowners, due to skyrocketing construction costs. I would have to believe things will get a lot worse, with upward pressure on costs and rates.”
Creating uncertainty in the overall market is the availability of terrorism insurance on p-c policies come Jan. 1, 2006, a day after the Terrorism Risk Insurance Act expires. While insurers cannot exclude terrorism from workers’ compensation policies, the question is whether or not they will seek to underwrite terrorism for p-c policies and the impact this would have on pricing. “My gut instinct is that many insurers will try to underwrite terrorism because they aren’t in the same panicked mode that led to the wide-scale (terrorism) exclusions after 9-11,” says Dreyer from S&P. “Moreover, nothing major has happened since insofar as another terrorist event. The loss ratio is, after all, 0%. There has to be some temptation here to write this business, which of course is a dangerous position to take. But, I imagine some insurers will attempt underwriting it, as will reinsurers, in measured doses.”
Why Now?
The apparent softening in most lines of insurance is a result of numerous factors, from the improved economy and lower priced reinsurance to increased insurance capacity and a robust industry surplus compelling more competition. Countering these factors are inadequate insurer loss reserves, lingering issues over asbestos liability and an uncertain legal liability environment that continues to defy the industry’s intense lobbying in Congress for tort reform.
Major, the Metris risk manager, says industry capacity is especially ample in the D&O market. “With the new Bermuda players and the reemergence of Lloyd’s of London’s D&O programs, I’m seeing plenty of capacity out there on the D&O side, with a lot of people willing to write this on an excess and high excess basis,” he says. Major also cites the improved economy as an influence: “My company is in the finance industry, so we watch the economy quite a bit. Since the credit card business is a key driver of the economy, I can say that we’re in the midst of improvement, which assists insurers to be more liberal in their pricing and conditions. Of course, the election can change this direction, as can another terrorist attack. But, the numbers we see are a lot better than they were three years ago.”
Moderating the marketplace is the civil justice system, says Thompson from The Hartford. “Congress has been unable to figure out a response to mass torts, which remain an inhibitor to a soft market,” he maintains. “Other potential inhibitors are loss reserves, with large multi-billion dollar numbers still floating around out there. These elements will compel more cautious softening. Consequently, there is no way I can conclude that what we have just seen in this renewal season is a primer for a dramatically softer market, where everything goes off the cliff.”
He adds: “The competition we’ve been seeing is for higher quality business, and there is no change with respect to giving away coverage for free like we’ve seen in the past.”
Certainly, a change in coverage terms and conditions would provide added evidence that a bona fide soft market is underway. “From what I’m hearing, terms and conditions from most carriers are holding,” says Horvath. “We’ll all be on the lookout for that next phase to start. If it does, then we can clearly call it a soft market.”
Banham (bzwriter@aol.com) is an IA senior contributing writer.
