Will 2013 be the year the market turns?
David J. Bresnahan: In 2012 we experienced a gradually firming market. In my opinion, 2013 will resemble 2012 in that it won’t be a hard market across the board, with massive rate increases or capacity restrictions, but we will continue to see positive rating in the property-casualty arena.
Tom Van Berkel: Premium and surplus leverage ratios for the property-casualty industry are running near .8 to 1.0, so there continues to be a tremendous amount of excess capital in the market.
From a balance sheet standpoint alone, the market would not turn in 2013. Because interest rates are so low, certain lines’ combined ratios have been high—especially workers’ compensation and homeowners—and cat activity has been heavy the past few years, companies’ income statements haven’t looked too strong.
Therefore, this could provide some necessary pressure for increased rates. We predict a continued firming rather than a typical across-the-board hard market.
Kevin T. Kenny: The P&C market has been turning gradually with some degree of inconsistency depending on geography, line of business and industry segment. 2013 will lead to additional firming, although underlying economic factors still limit the ability for many businesses to absorb the increases.
How important has program business become for your company?
Bresnahan: Program business has become a huge franchise for Lexington and AIG; AIG has asked our team in Boston to be the center of excellence for our program business. We have more than $1 billion of gross written premium through the program administrators we work with. Although we’ve traditionally been focused on property-casualty business, we also are looking to grow in products like financial or specialty lines. Every program should have its own niche. We’re just trying to bring those complimentary products to niches our program administrators already work in.
Paul Condrin: Liberty Mutual partners with agents and brokers to provide a full range of commercial insurance products to small, mid-sized and large companies. Program business is one such product we offer to specialized Program Administrators and MGAs, though we have not seen significant growth in program business opportunities.
Kenny: It always will be important. Having the ability to develop special products and services for a unique customer segment allows us to better serve them and build strong relationships within the segment. With respect to association or affinity programs, we enjoy learning more about our clients’ needs by fully understanding their core mission and business challenges. This serves both parties quite well.
Van Berkel: Apart from our assumed reinsurance operations, program business is a fairly small percentage of The Main Street America Group’s overall portfolio of small commercial, personal lines and bonds products. When there is an opportunity to add scale, we will entertain program business.
What impact will Superstorm Sandy have on pricing and cat planning?
Kenny: Sandy will definitely have an impact on property rates. The overall impact the storm had on individuals and business in a heavily populated and business-centric part of the country exposed the weaknesses of many business continuity plans. Business owners and risk managers will review how they can improve their state of preparedness in the future. Many lessons were learned and more emphasis will be placed on team member communication and proactive customer contact management.
Van Berkel: Superstorm Sandy, on top of several other pretty intense weather events over the past several years, is a factor in driving the insurance market a bit harder. Catastrophe planning continues to add importance to carriers managing their risk.
This is why The Main Street America Group has diversified geographically via acquisitions, affiliations and partnerships over the past 5 years. We have grown from 16 states along the Eastern Seaboard to 30 states across all regions of the country.
As we have learned in the past 2 years, major cats can hit anywhere. Until last year, New Jersey had not been hit by a hurricane for nearly 100 years; now they have been stricken in 2 consecutive years. Carriers need to be more careful, spread risk and buy appropriate levels of reinsurance.
Bresnahan: It’s obviously too early to know how big a loss Sandy will be because the industry is still analyzing claims and trying to get an understanding of the magnitude of the loss. However, it’s easy to say that it will affect some underwriting changes in the Northeast and could influence underwriting posture on commercial flood coverage. It will also likely mean that we won’t see rate reductions in the property market in 2013.
One of the lessons from Sandy relates to business continuity planning. Traditionally, this has focused on very specific geographic areas affected by a catastrophe, whether natural or man made. The assumption was that you could go 20 miles from the affected area and have recovery. Sandy showed how widespread the devastation and power outages could be, which probably had a lot of companies thinking of how geographically dispersed their assets have to be if they’re going to be part of a contingency plan.
Condrin: The commercial insurance market was hardening before Superstorm Sandy and we expect that hardening to continue with variations by line and geography. Superstorm Sandy underscores the need for business owners—partnering with their agents, brokers and insurers—to reassess the potential risks their businesses face, prioritize these risks, and to develop effective mitigation strategies to protect their bottom lines, facilities and employees.
What role will independent agents and brokers play in the future?
Bresnahan: I see them as critically important as they have been historically. Whether it’s a surplus lines or retail agent, they’re the lifeblood of our business. They also are a great source for innovative ideas and opportunities for new products. Many of our products began when an agent or broker came to us with a problem or uncovered a loss or exposure that their customer was grappling with that allows us to think about a way to solve the problem and bring new products and services to the market. For example, a broker’s hospital client explained that the emphasis on electronic data medical records meant they were spending hundreds of thousands of dollars on big multiyear IT projects to update their systems. However, the hospitals had little to no bargaining power with the IT vendors performing the work, who could limit their liability to a below-reasonable amount and exclude consequential damages. So if the vendor was negligent, the hospital could only recover a fraction of the true exposure. After hearing this, we came up with a product called Parity, which is project-specific excess IT E&O liability coverage, designed to fill that gap where the vendor’s coverage ends. This coverage was introduced this year and came right out of a need that our clients were seeing.
Van Berkel: The independent agent distribution system will continue to be the best method for consumers to purchase property-casualty insurance because of the expertise and choice independent agents provide.
Independent agents will continue to dominate the commercial lines market. In personal lines, independent agents currently only have a third of the market. In 2013, independent agents will focus on regaining market share by introducing the Consumer Agent Portal (CAP). The CAP system will enable independent agents to compete on a level playing field with captives and direct writers for homeowners and private passenger auto business. That’s why The Main Street America Group participated as one of six carriers which invested in the development of CAP.
Kenny: Brokers will always play a "trusted advisor" role. That may be needed now more than ever. Serving as a trusted advisor requires a perspective on the client’s business that ranges well beyond the management of their insurance program. Brokers have taken on more risk control activities, introduced technology tools that provide information and trend analysis in real time and provided creative solutions to an ever-expanding set of regulations in the employee benefits area. At Wells Fargo we help our clients succeed financially by availing them of an array of financial services products and services. We will continue to represent more than just "insurance procurement" to our clients.
Condrin: Independent agents and brokers will continue their key roles helping commercial insurance buyers develop effective and efficient ways to manage risk. Buyers at all sizes of companies and across all types of industries regularly highlight the key role independent agents and brokers play in helping them protect their companies.
Where will companies see profits in 2013?
Bresnahan: When you think about how insurers make money, it’s either through underwriting results or investments. What all companies already know about 2013 and beyond is that there’s going to have to be an increased contribution from underwriting profit to make up for the low investment yields that we’re expecting. A big reason why we’re in a period of prolonged positive rate change is because to get an appropriate return in the absence of large investment yields, companies have to rely more on underwriting results; they have to have targeted combined ratios in the mid to low 90s to get an appropriate return. I think of it as moving the goal posts and likely to lead to multi-year rate increases.
Van Berkel: In 2013, The Main Street America Group expects to continue to run a combined ratio in the low 90s for commercial lines. This includes all of our key small commercial products—contractors, commercial auto, workers’ compensation and multi-peril.
In personal lines, we expect our homeowners’ book to run under 100 and private passenger auto around 100.
We project our bonds portfolio will run a combined ratio in the mid-90s.
Kenny: International expansion will continue. Employee benefits will continue to be a source of opportunity because of the complexity of health care reform. All carriers and brokers will likely focus on their core strengths. This may include customer segmentation strategies, industry specialization and the further development of proprietary products and technology.
Condrin: Successful insurers, agents and brokers will continue to refine and improve business operations to reflect market conditions and opportunities. Rate firming is expected to continue across most lines of business to offset declining investment income and moderate, but rising, loss trends.