NEW YORK–On an accident-year basis, the property-casualty insurance industry as a whole is probably not making any money from underwriting, setting the stage for a market turn in 2010, an executive said here yesterday.

At a media briefing in New York, William R. Berkley, chair and chief executive officer of Greenwich, Conn.-based W.R. Berkley Corp., told reporters he believes the industry's underwriting results are either just at breakeven or that the industry is operating at a small underwriting loss for 2008.

“Fundamentally, we think the business will continue in a downward pricing mode through the first half of 2010,” Mr. Berkley said, predicting that more painful results of declining prices would start hitting the books for the industry in 2009.

For accident-year 2009, he estimated the industry combined ratio will be 105 or 106, “assuming inflation stays modestly in control.” He put a “modest” regular economic inflation level at less than 4 percent, with modest medical cost inflation falling in the 5.5-6.0 percent range.

In addition, “you have to recognize that whoever is elected [president] will look at recasting medical costs,” with the insurance industry paying a greater share of the costs, he said.

Next year, poor underwriting results will mean “marginal if any return on capital” for the industry overall, he predicted. “The underwriting losses will wipe out most [if not] all the investment income,” Mr. Berkley said, noting this is part of what's driving his view that the market will turn in 2010.

There will probably be “very bad results” in the first quarter of 2010, when continued price deterioration combined with a recognition of year-end 2009 results bring about a “real focus” on the need for pricing changes, he said. After 18-to-24 months of worsening results, the underwriting profit picture will start to “get substantially better” in the second half of 2010, he observed.

Mr. Berkley said another factor driving his view that the market turn is not as far away as history might suggest is the speed with which insurers have been taking down reserve redundancies in recent years. Historically, insurers let excess reserves “sit there” on their balance sheets, he said, later suggesting that regulatory initiatives aimed at making financial disclosures more transparent have helped to spur the more recent takedowns.

The turn could take a little longer if insurers delay reporting bad results, “but I'm assuming that people are impacted by Sarbanes-Oxley and will report something approaching actual results,” he said.

The lack of substantial redundancies to cushion the blow “will cause the realities” of the impact of the downward pricing cycle on results to “hit home more quickly,” he said.

Asked why his downbeat view is different from other executives, Mr. Berkley said, “If they don't have a view that profitability is going down, they have imaginary numbers.”

Asked about the notion that some analysts have advanced that the soft market won't turn until the industry experiences a catastrophic multibillion-dollar insurance loss, Mr. Berkley told National Underwriter that catastrophes can have the opposite effect.

Referring to industry actions in the wake of Hurricane Andrew in 1992, he said, “People like to think the industry responds to catastrophes, but that truly has not been the case.” Hurricane Andrew made people think the cycle was going to turn, when “in fact, all it did was put off the inevitable,” with the pricing cycle continuing downward “until we had a much worse bottoming-out in 1999 and 2000.”

Mr. Berkley was also asked whether a hard recession or crisis with some financial panic could harden the market before 2010. He responded that a financial crisis could keep the market harder for a longer period of time once it does turn, because the supply of capital to the business could diminish.

“One of the fundamental things on the edge of changing” is the amount of capital that comes in through sidecars and “all these special purpose vehicles where non-insurance people risk their capital,” he said. “If something were to happen to change people's availability of excess capital to take these kinds of risks, it would have a positive impact” in terms of prolonging the hard part of the insurance cycle, he said.

Excess capital in search of uncorrelated risks, he said, has put Goldman Sachs in the insurance business through a Lloyd's vehicle. It also put American International Group in the derivatives and airplane leasing business, he said.

“A great mathematical theory would prove that no financial risks are really uncorrelated,” he said, noting that the subtle correlation in all these risks is part of the problem that large financial institutions are currently facing.

Asked several times during the briefing to comment on AIG's current problems more directly, Mr. Berkley chalked up a lot of them to accounting standards that in some cases are “silly.”

“Did AIG really need to raise $12.5 billion at the close of business yesterday? I would think probably not, but they got stuck in all these accounting rules, which they probably didn't fully comprehend the consequences of beforehand, and that's what happened,” he said.

Special Reports /

Berkley Predicts Market Turn In 2010

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