What are your perceptions of the insurance market as it stands?

We're in a market that we haven't seen before. It's not a traditional hard market, which is measured by price increases of 10 to 15 percent or more, but over the last year or so we have seen some slight price increases across a variety of lines of business usually combined with reduced capacity.

We've seen firming in Commercial Property with natural catastrophe exposure, in Excess Liability and Lead Umbrella, and on some specialty lines like energy. We're seeing softening across all of Aviation due to several years of benign loss activity.

What makes it an odd market?

We can't say that all Property premiums are consistently up around a single-digit increase across all lines of business; we may see modest reductions or flat pricing on things that aren't exposed to natural catastrophes, so even the broad Property market is mixed.

Also, the market can tighten up without a price increase by increasing deductibles and firming other terms and conditions. This is partially powered by carriers who see that although there is low inflation in the economy, there is a lot of inflation in claims.

Thus, carriers are exerting pressure to make money from underwriting as they cannot rely on investment income to support a profit. This is driven by the fact that claims inflation is higher than the rate of economic inflation.

Why are rate increases remaining low?

I would say that there is ample capacity across most lines- most brokers will tell you that they have more capacity to fill their programs than needed.

Another sign of a unique firming market is that even companies with a lot of capacity are starting to look at how they position it so they can use it, but they are being careful how.

The insurance market is being inundated with “outside capital” from non-traditional investments like hedge funds and pension funds. How is this capital affecting the market?

One thing that is keeping the market “in check” is the amount of capital in the market, along with capacity.

Insurers don't want capital to be sitting on the sidelines, not going anywhere, but that means they have to deploy it at a more profitable level than other investments. Here we have another reason to return to disciplined underwriting.

Is improved modeling providing a more granular assessment of risk that is affecting the market?

Modeling has impacted the industry. For example, commercial models like RMS came out with new versions in recent months, which effectively raised rates on a lot of cat-exposed businesses.

Models, while they theoretically are getting better, are still somewhat blunt instruments: they are much more designed for pricing a risk portfolio.

When you deploy these models on a specific account, the answer is not necessarily accurate because they are based on averages and aren't relevant to that particular risk. We have fallen in love with our models, sometimes to detriment because they don't always balance out what good underwriting can provide.

How could a sunset of TRIA affect the P&C space?

The biggest problem with TRIA is that there is a point in time at which we made a mandatory offer of coverage under the law with no more federal backstop. This obvious disconnect has the potential to impact the industry.

We must consider whether the TRIA-type law continues, what will it look like? Can we afford to underwrite certain Property accounts without that backstop?

Can the attack at the Boston marathon sway the TRIA decision, or affect Property insurance overall?

Only to the extent that it will create in people's minds the idea that it can and will happen in the future. It will remind the industry, and Congress, that terrorism in virtually impossible to underwrite, yet it remains a real risk.

Whether the federal government will be involved in our insurance decisions or not, we need to be able to work with the risk now and in the future.

Special Reports /

Q&A: Bob Petrilli of Swiss Re Corporate Solutions

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