Economic cycles and underwriting cycles historically have little connection with one another, an industry expert said at a gathering of surplus lines insurers and brokers here.
Robert P. Hartwig, president of the New York-based Insurance Information Institute, provided that analysis during a speech at the annual meeting of the National Association of Professional Surplus Lines Offices, Ltd. during the Derek Hughes/NAPSLO Educational Foundation Lecture.
Mr. Hartwig devoted part of his time to the identification of industries and regions with potential growth prospects for excess and surplus lines market participants in the near term.
"The reality is there's not a strong association between what goes on the in the economy and what goes on in our business," he added, noting the recessions have historically occurred together with both hard and soft markets.
Highlighting the workers' compensation line as one area impacted by the economic recession, Mr. Hartwig said the underwriting cycle has had a bigger effect for insurers.
"As wages, salaries and payrolls fall, that is something that is contributing to a decline in workers' comp premiums, although most of that is driven by what is going on in rate--very competitive pricing in workers' comp," he said.
While industry capital plummeted with investment losses last year, and capital losses are typically a precursor of harder markets, "something else has to change--the perception of risk," he said.
Elevated insurance combined ratios--in the 115-to-120 range--have historically changed risk perceptions and heralded the return of hard market pricing, but Mr. Hartwig said he doesn't foresee the industry coming close to those levels in 2009.
Last year, he said the p&c insurance industry ran a 101 combined ratio overall (excluding mortgage and financial guaranty insurers). This year, the industry has been running a 99.5 combined ratio--and even adding a few points to eliminate boosts from reserve releases related to prior years won't bring the numbers to anywhere near the dire levels they reached a decade ago, he said.
Offering a different interpretation of combined ratio numbers at a later Friday session, Jim Carey, president and chief executive officer of Admiral Insurance Company in Cherry Hill, N.J., started his own analysis with the reported industry combined ratio of 105 for 2008.
Taking out two points of catastrophe losses that probably won't recur, Mr. Carey said, "in this business, if you don't get a price increase, your claims go up 5 or 6 percent for inflation--taking a 103 starting combined ratio to 108 or 109 for 2009.
Another year of flat pricing and loss inflation brings the combined ratio figure to 112-to-115 for 2010, he said. "We're heading for some pretty tough times [and] underwriting losses will erode capital."
While all companies won't be equally affected, Mr. Carey asserted, "There will be pain. There will be noise, and that's what always happens. For the markets to change, you've got to feel the pain."
At the earlier session, Mr. Hartwig said that "something that's not being watched at all--something that can turn the market--is an emerging tort threat."
"There has not been one iota of tort reform" since the makeup of Congress changed in 2006, he said.
While industry commentators periodically point to insurance company failures as a precursor of a market turn, Mr. Hartwig isn't expecting that kind of fallout to occur directly as a result of the economic recession.
"The industry tends to weather economic downturns well," he said, pointing to statistics from a recent A.M. Best report prepared for NAPSLO that shows the No. 1 cause for insolvency is loss reserve deficiency, not economic phenomena.
Still, Alan Kaufman, chairman and CEO of Burns & Wilcox, a Farmington Hills, Mich.-based wholesaler and MGA, highlighted the solvency and stability of insurance companies as a key challenge for the industry that he believes NAPSLO brokers should be worried about.
"At this point, I can't pick one that's not solvent, but we certainly are more conscious of who's going to be around," said Mr. Kaufman during a separate interview with NU at the NAPSLO conference.
"We're very cautious about who our partners are, and what market share of our total business we want to give to our carriers, whether on the underwriting or the brokerage business," he said. "Down the road, you don't want to find out that the carrier that you're placing a nice percentage of your business with either has to back off because of capacity [issues] or they can't write because of a downgrade or their reserves are inadequate."
"I don't think anybody's paying attention to that now. They're just worried about making it through the market, but [they need to be] looking beyond that."
During the panel discussion, Mr. Carey predicted that when this soft market finally starts to change, "we won't see the class hockey stick or vertical change" in prices of prior hard markets. He said he based his assessment on 37 years in the industry and the unprecedented twin impacts of the economic recession and the soft market that have particularly impacted the construction industry--a segment that's become very important to E&S writers.
Two other experts on the panel predicted that the hard market, whenever it comes, will be brief in duration.
Jim Keating, president of The Keating Group in Boston said, "The fact that there are so many people out there in the financial industry watching us like hawks [means] that the first whiff of any kind of hard market will [drive] a flood of money coming in--both to the admitted and the nonadmitted side."
"I'm not looking forward to a hard market as much as a lot of other people," he said. "There's just a lot of sideline capital."
Maureen Caviston, president of Partners Specialty Group in Stamford, Conn. agreed. "Most of my career has been what I consider a soft market," she said, also noting that industry continue to attract new capital that makes firmer market brief.
