While most insurance industry professionals would agree there isnever really a good time for a soft market, having one during aneconomic downturn creates a particularly unique set of challengesfor inland marine carriers, as a slowing economy, collapsinghousing market and soaring oil prices squeeze the segment's twobiggest sources of business--construction and trucking risks.

For the construction industry, the subprime crisis andsubsequent housing market crash has brought many projects to agrinding halt, as the number of new residential properties hasfallen off significantly. Additionally, woes in the residentialconstruction market are not being sufficiently offset by anyincrease in other types of building projects in a slackeningeconomy.

Meanwhile, the rising price of fuel has dramatically increasedcosts for the trucking industry, while revenues have remained flator begun to fall to reflect slower economic activity. This scenariohas threatened the economic viability of some trucking companies,but it has also created safety issues, as these firms have lessmoney to reinvest in the maintenance of their fleets.

Combined, these grim economic realities have created not only ashrinking base of premium dollars for inland marine insurers but ariskier underwriting environment as well. And while this would seemto be a time for disciplined pricing and a strict reevaluation ofexposures, the opposite is holding true, as the soft marketconditions affecting all property-casualty lines are just asprevalent--if not more so--in inland marine.

In a way, the sector is a victim of its own past success,according to Ron Thornton, president of the Inland MarineUnderwriting Association. He explained that commercial inlandmarine has generated healthy profitability--with combined ratios inthe high 80s and low 90s for the last six years--and these numbersare now attracting new players to the market.

"When these companies come in, they come into the marketplace,as they really have to, as full-service providers to all of thevarious inland marine lines of business," Mr. Thornton said. "Andobviously, with trucking, construction and contractor's equipmentbeing the largest lines of business, [the new entrants] have to beplayers in that marketplace."

Additionally, with all segments of p-c insurance under pressurefor growth, some companies are leaning more heavily on their inlandmarine underwriters, despite the challenges in that marketplace,because of its historic profitability, players in the marketnote.

"I think the feeling is that the marine people can probablynavigate through [the soft market] a little better," according toSophia Phillips, vice president of Hanover Insurance Group. "It'samazing right now how many companies are trying to get into theinland marine business."

Explaining this dichotomy of more players competing for fewerdollars and the effects that will have on insurers, Mr. Thorntonsaid that, with respect to construction, "single-family, smallcondo housing development was really buoying up the constructionindustry. When that marketplace collapses, what's going to happento the inland marine underwriters who are writing constructioninsurance is that their premium base--that which is [based on]construction--is going to decline."

While noting he could not speak specifically to pricing, Mr.Thornton said, "what I can tell you is that if a company wascharging 'X' for a particular contractor, and his construction isdown, that premium is charged against a lesser base, which willmean lesser dollars coming into the insurance company."

Despite the fewer available dollars, Mr. Thornton said the softmarket has created conditions where new players are coming into thesector, while existing companies are fighting to protect theirmarket share.

(Inland marine experts also point out that the entrance of newplayers is heating up an already testy war for talent. See theaccompanying story on page 13.)

Speaking to the decreasing amount of business over which tocompete, Mr. Thornton said that "if the size of the pie [isshrinking], then these people are chasing less available businessthat they can insure, and that's going to create competition."

"Is it fierce? I don't think so yet," he added. "Could it be?Possibly, because you have a number of players that have enteredthe market with substantial capital backing that are trying tobuild up a book of business. And they're trying to build it up at atime when economic realities are kind of smacking them in theface."

For the construction business that is left, there is anincreasing value attached to it--and that, too, is due to economicfactors.

"It's an interesting dynamic, because there is a smaller pieceof the pie in terms of activity, but the activity that is going on,because of commodity prices, we're seeing larger values associatedwith it," explained Rich Soja, global manager of Chubb MarineUnderwriters.

"So while we're not seeing as many new starts in terms ofresidential home constructions, and while we're seeing projectspossibly being delayed because of commodity prices, we're seeingthe average value of construction activities going up because ofplacement costs, so it is a strange dynamic going on, but there isa variety of factors," he said.

With respect to trucking, some of the economic problemschallenging that segment mirror those seen in construction.

Mr. Thornton recalled that an economist from the AmericanTrucking Association, addressing IMUA's annual conference lastyear, projected that trucking revenues would be on the decline ifthe economy slowed.

Now, Mr. Thornton noted, the downturn of the economy hasprompted 14 straight months of declining carriage of goods, whichmeans falling freight rates.

These factors, Mr. Thornton said, make up part of the basis onwhich inland marine underwriters calculate premium. Much like theconstruction industry, he explained, "if you're insuring a truckerand they're carrying less cargo, that means a lesser base, soyou're bringing in less premium dollars each month."

But trucking comes with its own unique problems, according toMs. Phillips. "With trucking, you have a whole set of issues--forexample, consider the price of gas. These [trucking companies] areaffected because their costs have gone up dramatically, but I don'tthink [they are] getting a lot more money for what they'redoing."

Ms. Phillips explained how general economic-based problems canimpact maintenance. "There is less money for these companies toreinvest in their fleets and to keep them maintained," she said."To offset their increased costs, truckers have to make choices.For example, do they go an extra 500 miles before they get thatnext oil change or that next maintenance check?"

That has an impact on inland marine insurers, according to Mr.Soja.

"So as the economy worsens and fuel prices go up at the sametime, the health of the trucking industry in general--and obviouslythere are good truckers and bad truckers--becomes more difficult,and therefore inland marine underwriters may be more exposed as aresult of that," he said.

"Truckers may start to maintain their vehicles less diligentlybecause they simply can't afford it, and that may cause additionaldamage to cargo," he added. "So there are all kinds of knock-oneffects from financial deterioration that may not be verysimplistic, but in the aggregate, really add up."

However, Mr. Soja pointed out, many factors go into therelationship between the economy and insurance, and it is difficultto point to any of them as an all-encompassing truth for truckingor construction.

"I'm not sure that you can draw a perfectly straight linebetween one thing that's going on in the economy and carry it allthe way through all customers and therefore insurers," he said.

Ultimately, for insurers looking for business in any economicenvironment, it comes down to careful selection of risks, accordingto Mr. Soja. "Because regardless of the industry you're[underwriting]," he said, "there will always be very good risks,even in bad [economic] times."

For some entering the inland marine market looking to write alot of new business in what has been a highly profitable niche,there may be a few wake-up calls on the horizon, specialistswarned.

"Some of these new players that have come into the market mightbe frustrated that they can't generate the type of income thattheir models have [predicted]," according to Mr. Thornton.

He added that current players in the market may also be in forsome changes, and that could alter the landscape of the inlandmarine segment overall.

"I think existing players are going to be affected when theylook at lines of business and how they allocate surplus," Mr.Thornton said. "If a particular line is not growing the way theythought it would grow, or if they see that the results are not theway they used to be, I think there could be a reallocation of anindividual company's surplus, and therefore that could affect themarketplace."

Mr. Thornton predicted that "there's going to be a lotof...belt-tightening and concern over a possible decline in thehistoric profitability of this line of business as more and morepeople fight through fewer and fewer available dollars andaccounts."

Mr. Soja and Ms. Phillips both expect established inland marineplayers to approach this market the same way they have survivedsimilar soft periods in the past--by fighting for their renewalbusiness and carefully selecting new risks.

"I think what you will see from the more experiencedunderwriters, they will try to hang on very diligently to theirrenewal books and do whatever it takes to keep them, up to a point,because those are accounts that they know," said Ms. Phillips.

"So while they may feel that the price on a renewal may alreadybe very competitive, there is a willingness to stretch on goodaccounts," she added. "The experienced underwriters know when tostretch, when to hold the line, and when to let go."

She added that on newer business, experienced underwriters arestill maintaining their walk-away price. "I think what you find isthat, as much as everyone wants inland marine to grow, your bettercompanies get it," she said, noting that these experienced carrierswill not want to sacrifice rate of return for growth.

The idea of fighting hard to hold on to existing business alsoseems to be apparent among inland marine agents and brokers.

Steve Whitmarsh, vice president, executive general adjuster andbranch manager of McLarens Young International, a provider ofclaims services, said he has observed producers working harder toserve their existing clients on the claims side.

"What I see is that the agents and brokers are trying very hardto keep and maintain the business that they have," he said. "I'mseeing the brokers become more involved in the claims process. Theywant to know weekly and daily about the claims to make sure theirclients are being taken care of, and that is definitely ashift."

He added: "What I was used to is, you get a claim, you go outand work it, and you don't hear a peep from the broker or theagent. And I'm just seeing a lot more of them trying to keep whatthey already have to make sure that they don't lose anything."

For his part, Mr. Soja sees only minor, unique differences inwhat is otherwise essentially a standard soft market cycle.

"In my opinion, I think it's pretty standard fare," he said."Each [soft market] has different nuances," including:

o "Most companies are starting from probably a better place thanthey were before, entering a soft market," he said. "The years2001-2004 really got most companies' balance sheets verystrong."

o "Capital providers are less patient, less tolerant withnonperformance from a return-on-equity perspective," he said,noting that this "hopefully will reduce the length of the softmarket."

"I think the reaction of capital providers to not making moneyis going to be more swift than at times in the past," he added."And inland marine, being a first-party line, the results of poordecisions or poor pricing are going to show up quicker, and itcould be one of the first segments impacted as a result ofthat."

For the near future, however, Mr. Soja said he expects currentsoft market conditions to continue through 2008 and probably 2009,as well. This could change, he noted, if the subprime crisisworsens, or if a significant natural catastrophe strikes.

Ms. Phillips said she does not see a significant long-termimpact resulting from the current market. "I don't see a crash,"she said, "but you're talking to the world's greatest optimistright now."

She added that "this is not the first time we've been through asoft market. Your stronger players will do the right thing--they'llhold their ground." Eventually, she said, the market will return toa place where companies can again effectively compete.

Much about the future of the market, though, may depend on whathappens with the overall economy, according to Mr. Thornton.

"I think, across the line, the economy kind of driveseverything, and the economy's going to impact insurance companiesand their appetites, and where they put their surplus, and that'sgoing to impact virtually all the lines of inland marine business,"he said.