Is The Hard Market Over? Not So Fast, Jardine Warns

Despite increased capacity in some insurance markets and a return to financial stability for many insurers, the overall pricing climate will remain hard through 2004, a major brokerage predicted.

In its latest state of the market report, “A Fragile Stability,” London-based Jardine Lloyd Thompson Group, plc, said it expects to see hard market conditions continue as the insurance market slowly continues its return to “stability.”

However, despite substantial premium hikes and below-average catastrophe losses during 2003, the markets rebound remains fragile, the brokerage warned.

“As we draw toward the end of the year, it is likely that many of the international equity markets will close higher than they opened at the beginning of the year,” said Steve McGill, chief executive officer for Jardine. “Nevertheless, the capital destroyed from the industry will take years to rebuild. The affected [insurers and reinsurers] can ill-afford to allow prices to plummet.”

He added that “despite the reductions for some rates in 2003 and the emergence of fresh capacity, we believe that, overall, the hard market will continue to sustain itself in 2004. Therefore, many of the signs of the hard market will continue to exist, albeit with pressures to diminish.”

With longer-tail casualty rates climbing and capacity squeezed in some lines, more insurers will see in liability coverages “an increasingly attractive area for insurers to expand into,” he concluded.

Jardine noted that Bermuda is emerging as a strong player in the international insurance market and anticipates competition will “become fiercer” in 2004.

While more new money has come into the European and U.S. insurance markets than Bermuda, the new capital in the U.S. and Europe went to rebuilding balance sheets, he noted. Meanwhile, the new Bermuda capital went toward underwriting, and players on the island also have the advantage of not dealing with legacy reserve issues. A combined ratio below 100 means Bermuda carriers are also earning a better return for investors than their off-island competitors, he added.

Despite price increases, the future remains uncertain, Jardine said, calling the slow return toward stability “a fragile balance.” Insurer and reinsurer reserves are still depleted because of poor returns on equities in 2002. Loss reserve adequacy remains uncertain, especially related to long-tail exposures such as asbestos. Jardine warned that a series of catastrophe losses, either man-made or natural, “would cause some carriers, especially reinsurers, significant difficulties.”

Jardine also said it does not see much merger and acquisition activity for carriers. However, there may be incentives for U.K. brokers to seek mergers due to regulatory pressure, client demands for stability and financial strength, and continued focus on corporate governance.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Is The Hard Market Over? Not So Fast, Jardine Warns

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