While most insurance industry professionals would agree there is never really a good time for a soft market, having one during an economic downturn creates a particularly unique set of challenges for inland marine carriers, as a slowing economy, collapsing housing market and soaring oil prices squeeze the segment's two biggest sources of business--construction and trucking risks.

For the construction industry, the subprime crisis and subsequent housing market crash has brought many projects to a grinding halt, as the number of new residential properties has fallen off significantly. Additionally, woes in the residential construction market are not being sufficiently offset by any increase in other types of building projects in a slackening economy.

Meanwhile, the rising price of fuel has dramatically increased costs for the trucking industry, while revenues have remained flat or begun to fall to reflect slower economic activity. This scenario has threatened the economic viability of some trucking companies, but it has also created safety issues, as these firms have less money to reinvest in the maintenance of their fleets.

Combined, these grim economic realities have created not only a shrinking base of premium dollars for inland marine insurers but a riskier underwriting environment as well. And while this would seem to be a time for disciplined pricing and a strict reevaluation of exposures, the opposite is holding true, as the soft market conditions affecting all property-casualty lines are just as prevalent--if not more so--in inland marine.

In a way, the sector is a victim of its own past success, according to Ron Thornton, president of the Inland Marine Underwriting Association. He explained that commercial inland marine has generated healthy profitability--with combined ratios in the high 80s and low 90s for the last six years--and these numbers are now attracting new players to the market.

"When these companies come in, they come into the marketplace, as they really have to, as full-service providers to all of the various inland marine lines of business," Mr. Thornton said. "And obviously, with trucking, construction and contractor's equipment being the largest lines of business, [the new entrants] have to be players in that marketplace."

Additionally, with all segments of p-c insurance under pressure for growth, some companies are leaning more heavily on their inland marine underwriters, despite the challenges in that marketplace, because of its historic profitability, players in the market note.

"I think the feeling is that the marine people can probably navigate through [the soft market] a little better," according to Sophia Phillips, vice president of Hanover Insurance Group. "It's amazing right now how many companies are trying to get into the inland marine business."

Explaining this dichotomy of more players competing for fewer dollars and the effects that will have on insurers, Mr. Thornton said that, with respect to construction, "single-family, small condo housing development was really buoying up the construction industry. When that marketplace collapses, what's going to happen to the inland marine underwriters who are writing construction insurance is that their premium base--that which is [based on] construction--is going to decline."

While noting he could not speak specifically to pricing, Mr. Thornton said, "what I can tell you is that if a company was charging 'X' for a particular contractor, and his construction is down, that premium is charged against a lesser base, which will mean lesser dollars coming into the insurance company."

Despite the fewer available dollars, Mr. Thornton said the soft market has created conditions where new players are coming into the sector, while existing companies are fighting to protect their market share.

(Inland marine experts also point out that the entrance of new players is heating up an already testy war for talent. See the accompanying story on page 13.)

Speaking to the decreasing amount of business over which to compete, Mr. Thornton said that "if the size of the pie [is shrinking], then these people are chasing less available business that they can insure, and that's going to create competition."

"Is it fierce? I don't think so yet," he added. "Could it be? Possibly, because you have a number of players that have entered the market with substantial capital backing that are trying to build up a book of business. And they're trying to build it up at a time when economic realities are kind of smacking them in the face."

For the construction business that is left, there is an increasing value attached to it--and that, too, is due to economic factors.

"It's an interesting dynamic, because there is a smaller piece of the pie in terms of activity, but the activity that is going on, because of commodity prices, we're seeing larger values associated with it," explained Rich Soja, global manager of Chubb Marine Underwriters.

"So while we're not seeing as many new starts in terms of residential home constructions, and while we're seeing projects possibly being delayed because of commodity prices, we're seeing the average value of construction activities going up because of placement costs, so it is a strange dynamic going on, but there is a variety of factors," he said.

With respect to trucking, some of the economic problems challenging that segment mirror those seen in construction.

Mr. Thornton recalled that an economist from the American Trucking Association, addressing IMUA's annual conference last year, projected that trucking revenues would be on the decline if the economy slowed.

Now, Mr. Thornton noted, the downturn of the economy has prompted 14 straight months of declining carriage of goods, which means falling freight rates.

These factors, Mr. Thornton said, make up part of the basis on which inland marine underwriters calculate premium. Much like the construction industry, he explained, "if you're insuring a trucker and they're carrying less cargo, that means a lesser base, so you're bringing in less premium dollars each month."

But trucking comes with its own unique problems, according to Ms. Phillips. "With trucking, you have a whole set of issues--for example, consider the price of gas. These [trucking companies] are affected because their costs have gone up dramatically, but I don't think [they are] getting a lot more money for what they're doing."

Ms. Phillips explained how general economic-based problems can impact maintenance. "There is less money for these companies to reinvest in their fleets and to keep them maintained," she said. "To offset their increased costs, truckers have to make choices. For example, do they go an extra 500 miles before they get that next oil change or that next maintenance check?"

That has an impact on inland marine insurers, according to Mr. Soja.

"So as the economy worsens and fuel prices go up at the same time, the health of the trucking industry in general--and obviously there are good truckers and bad truckers--becomes more difficult, and therefore inland marine underwriters may be more exposed as a result of that," he said.

"Truckers may start to maintain their vehicles less diligently because they simply can't afford it, and that may cause additional damage to cargo," he added. "So there are all kinds of knock-on effects from financial deterioration that may not be very simplistic, but in the aggregate, really add up."

However, Mr. Soja pointed out, many factors go into the relationship between the economy and insurance, and it is difficult to point to any of them as an all-encompassing truth for trucking or construction.

"I'm not sure that you can draw a perfectly straight line between one thing that's going on in the economy and carry it all the way through all customers and therefore insurers," he said.

Ultimately, for insurers looking for business in any economic environment, it comes down to careful selection of risks, according to Mr. Soja. "Because regardless of the industry you're [underwriting]," he said, "there will always be very good risks, even in bad [economic] times."

For some entering the inland marine market looking to write a lot of new business in what has been a highly profitable niche, there may be a few wake-up calls on the horizon, specialists warned.

"Some of these new players that have come into the market might be frustrated that they can't generate the type of income that their models have [predicted]," according to Mr. Thornton.

He added that current players in the market may also be in for some changes, and that could alter the landscape of the inland marine segment overall.

"I think existing players are going to be affected when they look at lines of business and how they allocate surplus," Mr. Thornton said. "If a particular line is not growing the way they thought it would grow, or if they see that the results are not the way they used to be, I think there could be a reallocation of an individual company's surplus, and therefore that could affect the marketplace."

Mr. Thornton predicted that "there's going to be a lot of...belt-tightening and concern over a possible decline in the historic profitability of this line of business as more and more people fight through fewer and fewer available dollars and accounts."

Mr. Soja and Ms. Phillips both expect established inland marine players to approach this market the same way they have survived similar soft periods in the past--by fighting for their renewal business and carefully selecting new risks.

"I think what you will see from the more experienced underwriters, they will try to hang on very diligently to their renewal books and do whatever it takes to keep them, up to a point, because those are accounts that they know," said Ms. Phillips.

"So while they may feel that the price on a renewal may already be very competitive, there is a willingness to stretch on good accounts," she added. "The experienced underwriters know when to stretch, when to hold the line, and when to let go."

She added that on newer business, experienced underwriters are still maintaining their walk-away price. "I think what you find is that, as much as everyone wants inland marine to grow, your better companies get it," she said, noting that these experienced carriers will not want to sacrifice rate of return for growth.

The idea of fighting hard to hold on to existing business also seems to be apparent among inland marine agents and brokers.

Steve Whitmarsh, vice president, executive general adjuster and branch manager of McLarens Young International, a provider of claims services, said he has observed producers working harder to serve their existing clients on the claims side.

"What I see is that the agents and brokers are trying very hard to keep and maintain the business that they have," he said. "I'm seeing the brokers become more involved in the claims process. They want to know weekly and daily about the claims to make sure their clients are being taken care of, and that is definitely a shift."

He added: "What I was used to is, you get a claim, you go out and work it, and you don't hear a peep from the broker or the agent. And I'm just seeing a lot more of them trying to keep what they already have to make sure that they don't lose anything."

For his part, Mr. Soja sees only minor, unique differences in what is otherwise essentially a standard soft market cycle.

"In my opinion, I think it's pretty standard fare," he said. "Each [soft market] has different nuances," including:

o "Most companies are starting from probably a better place than they were before, entering a soft market," he said. "The years 2001-2004 really got most companies' balance sheets very strong."

o "Capital providers are less patient, less tolerant with nonperformance from a return-on-equity perspective," he said, noting that this "hopefully will reduce the length of the soft market."

"I think the reaction of capital providers to not making money is going to be more swift than at times in the past," he added. "And inland marine, being a first-party line, the results of poor decisions or poor pricing are going to show up quicker, and it could be one of the first segments impacted as a result of that."

For the near future, however, Mr. Soja said he expects current soft market conditions to continue through 2008 and probably 2009, as well. This could change, he noted, if the subprime crisis worsens, or if a significant natural catastrophe strikes.

Ms. Phillips said she does not see a significant long-term impact resulting from the current market. "I don't see a crash," she said, "but you're talking to the world's greatest optimist right now."

She added that "this is not the first time we've been through a soft market. Your stronger players will do the right thing--they'll hold their ground." Eventually, she said, the market will return to a place where companies can again effectively compete.

Much about the future of the market, though, may depend on what happens with the overall economy, according to Mr. Thornton.

"I think, across the line, the economy kind of drives everything, and the economy's going to impact insurance companies and their appetites, and where they put their surplus, and that's going to impact virtually all the lines of inland marine business," he said.

Special Reports /

Economy, Fuel Prices Hit Inland Marine With Double Whammy

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