Producers looking for a light at the end of the tunnel in this soft, increasingly competitive commercial insurance pricing cycle see no sign of a turnaround this year–or even into early 2009 at this point, those agents and brokers queried by National Underwriter for their assessment of the state of the market agree.

“My sense is that this is early in the soft market, and we have not seen it fully develop,” according to Don Bowles, president of Dallas-based McQueary Henry Bowles Troy, an insurance brokerage firm that received an “Honorable Mention” in NU's 2006 “Commercial Insurance Agency Of the Year” award program. “I still see a tremendous amount of capacity, strong balance sheets and adequate reserving.”

H. Wade Reece, chairman and chief executive officer of BB&T Insurance Services in Raleigh, N.C., said he believes there will be some moderation in rate decreases, “but short of a catastrophe, [the current market] will be with us for quite some time. I'm not calling this a soft market–it's just the market.”

When asked what worries him about the market, Peter F. Garvey, president of New York-based Integro, cited “an underlying concern that there is something we are not anticipating–some bad news we are not expecting. There is no basis for that other than if you look at the financial services business, there have been some surprises there that have had an effect on some of the carriers. But there have not been any significant surprises of note in the insurance business yet, so you hope there won't be.”

Competition is coming from several directions, noted Tom Coughlin, director of marketing for Willis North America. Not only are traditional U.S. insurers competing with one another, but also London and Bermuda carriers are coming more aggressively into the property-casualty arena here, heating up already stiff competition.

“It just seems that more and more foreign companies are establishing or enhancing operations in the United States,” said Mr. Coughlin.

“In a nut shell, there is abundant capacity out there,” said Warren Mula, managing principal and executive vice president for the Chicago-based Aon Brokerage Group, noting his observations are primarily focused on large-to-midmarket accounts.

“We're seeing 12-to-15 percent rate declines in most lines,” he said. “But the underwriting community is showing reasonable underwriting diligence.”

“There is a lot of underwriting capacity,” agreed Mr. Bowles. “Insurers have robust budgets for 2008 and are aggressively looking for opportunities to deploy that capital.”

“This time last year we began to see a deceleration in pricing,” noted Mr. Reece, adding that price declines have been broad-based and fallen more quickly than anticipated. There was some thought price cuts would moderate, but that has not been the case for many accounts, as premiums have continued to drop, he observed.

One effect of the market decline has been significant movement of risk from the excess and surplus lines market back to standard carriers as insurers expand their risk appetite, he said.

“It's all the classic signs of a soft market,” remarked Mr. Reece, adding that he sees this as “a normal market correction.”

Integro's Mr. Garvey observed that the market is as “soft as you read about it,” but noted there are isolated pockets where price declines are not as severe as others.

Indeed, there does not appear to be anything on the horizon likely to change the overall commercial insurance market's downward direction–not even recent declines in investment portfolios or the general economic downturn, he said.

“A lot of carriers are coming off a year with a lot of profitability, but…with a lack of growth from a premium standpoint, they are still in need to write new business,” said Mike Pesch, area president of Arthur J. Gallagher Risk Management Services.

He warned that some insurers are on the verge of becoming “irrational” and losing their underwriting discipline, predicting that over the next six-to-12 months, carriers will begin to write business at pricing levels that will negatively affect their 2008 results.

However, if you are a commercial insurance buyer, times couldn't be better, Mr. Pesch said. “It's good for the consumer, and we try to stay ahead of that curve by telling our customers to expect favorable pricing upon renewal,” he said.

Property market declines are not as steep as they were at the end of 2007, and there are openings for negotiations on terms and conditions, reported Jeffrey Fieldson, managing director of Marsh's Global Property Practice, during a recent webinar to coincide with the brokerage's release of its “U.S. Insurance Market Report 2008,” covering the first quarter.

All those interviewed agreed that property-catastrophe exposures–which suffered the greatest premium increases after the 2004-2005 record hurricane seasons–are now experiencing declines with sufficient capacity for the risk.

“Property-catastrophe is seeing some easing,” said Aon's Mr. Mula, noting that prices are not declining as fast as for noncat property exposures.

However, Mr. Garvey said it is still difficult to characterize the property-catastrophe market as softening because of the significant increases that policyholders had to swallow in the last couple of years.

For the largest catastrophe risks, rates and terms are improving while capacity is increasing, he noted. Insurance is available, which was not always the case in certain areas, he said–it's just a matter of how much it will cost.

However, another severe catastrophe loss, Mr. Mula warned, could turn the recent price declines around in a hurry.

One market seeing rate hikes is financial institutions seeking directors and officers liability coverage if they have subprime-related exposures.

Indeed, Dan Tropp, area vice president for A.J. Gallagher Risk Management Services, said the only time he has heard the term “increase” recently was out of London, noting that a colleague there said D&O coverage with any subprime exposure is getting hit with a 10 percent premium boost.

Jill Sulkes, managing director of financial and professional liability for Marsh, said the financial institution marketplace is definitely experiencing some difficulty renewing D&O coverage, with some accounts seeing a doubling of premiums and co-insurance requirements.

“Even our [financial institution] clients with little or no subprime exposure are no longer seeing reductions,” she noted.

Errors and omissions exposure affecting other players covered by professional liability policies could also be hit by the subprime credit crisis, she noted.

The credit crisis is affecting business in another way, according to BB&T's Mr. Reece. Traditionally, insurance market cycles go in the opposite direction of the economy, he noted, pointing out that this time, insurers and the overall economy are experiencing declines simultaneously, which does not make for a comfortable situation for any insurer's or broker's bottom line.

For instance, he explained, because of company layoffs, a workers' compensation audit can end up reducing the price the insured pays because of a smaller payroll to cover, cutting premiums for the carrier and commissions for the broker.

“This, too, shall pass,” said Mr. Reece. “What we are telling our folks is that there are two ways to react to this–keep your clients and get more clients.”

At least in terms of retention, brokers say clients are standing pat–helped by the fact that intermediaries are bringing clients good news in the form of rate cuts and coverage expansion.

Brokers also say they are determined to give their clients the kinds of value-added service that will discourage them from going elsewhere over a premium quote.

Special Reports /

No Light At The End Of The Tunnel Seen By Brokers On Soft Market Prices

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