While there is near-universal agreement that carriers are achieving rate increases for P&C business, analysts and company & brokerage executives are struggling to ascertain what the current, gradually hardening market will look like in the long term.

J. Patrick Gallagher, president and CEO of brokerage Arthur J. Gallagher, said during Keefe, Bruyette & Woods' Insurance Conference, held Sept. 5 in New York, that the current rate environment is unique relative to the prior three market cycles he's seen. Rates are beginning to firm, but the industry is not seeing the “spike recovery” in rates typical of a hard-market turn, he added.

In fact, Gallagher said he believes there will not be a classic hard market in this cycle—and that is a good thing. Typical hard markets, he explained, are marked by short-lived radical rate increases, a lack of coverage availability and a rush to surplus lines for some risks. Now, the industry is instead seeing moderate increases, continued coverage availability and an orderly shift of some risks to the surplus-lines market.

The difference in this market cycle, Gallagher noted, is that insurers are in need of income-statement repair, not balance-sheet repair—and this environment is better for clients, better for carriers and great for brokers. In a traditional hard market, he said, clients walk away from the process angry at their brokers and insurers as rates spike and coverage availability is constricted.

In its recent “Six Months 2012 P&C Industry Review,” ALIRT Insurance Research, based in Windsor, Conn., also notes the market's uncertain direction, stating that opinions seem to be mixed on whether the industry will see a true hard market or a tapering off of higher prices given the marketplace's underlying financial conditions.

The direction of the P&C market, ALIRT says, ultimately lies in the hands of carriers and brokers. “Company management cannot control the weather or global investment conditions, but they can control decisions tied to pricing, terms and conditions, and risk selection,” ALIRT says. “There is evidence that companies—despite decent capital positions—are beginning to display this underwriting discipline.”

ALIRT adds that brokers' ability to “sell” higher prices to insureds “may be critical for this incipient hardening market to gather momentum.”

William R. Berkley, chairman and CEO of W.R. Berkley Corp., said at KBW's conference that he believes the industry is only at the beginning of a market-cycle turn, and he expects his company's relative performance in the marketplace to improve as the cycle turns further.

Reports have shown the industry's reserve position overall remains positive, although ALIRT and a recent Moody's Investors Service report on the commercial-insurance industry both reiterated the feeling that reserve margins will continue to thin going forward.

Moody's reserve analysis as of year-end 2011 suggests that standard commercial-lines insurers, in aggregate, continue to hold overall modestly positive margins of 1-2 percent of carried reserves but that reserve redundancies have steadily diminished over the past five years.

ALIRT also notes a slowdown in commercial-lines reserve releases, stating that 95 percent of all 2012 first-half reserve releases for its composite of 50 U.S. insurers came from personal-lines companies.

For his part, Berkley expressed skepticism at the KBW conference over competitors' reported loss ratios and reserve positions. He said when he looks back at developed loss ratios over the last 25 years, “I see we do 6-10 points better than the industry.” With competitors reporting better loss ratios than W.R. Berkley's, Berkley said, “I have one of two things to conclude: Either we're stupid…or they are underestimating their losses.”

If competitors are underestimating their losses, Berkley added, it's a certainty that accident-year reserves are inadequate.

Regardless of where the market is or might be heading, insurers need to seek more rate, according to Moody's. The ratings agency, in its U.S. Commercial P&C Insurance Outlook, notes that pricing trends remain “broadly positive” but adds: “Pricing improvement will need to continue in order for commercial insurers to further reduce accident-year loss ratios to acceptable return levels, especially with likely reduced benefit in 2013 and beyond from reserve releases on business written in prior years.”

Special Reports /

Execs, Analysts Try to Make Sense of P&C Market Cycle

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