With the parent of the property-casualty market's biggest player in turmoil, and the financial meltdown on Wall Street hammering insurer investment portfolios and making capital scarce, the insurance brokerage community is scrambling to get more information to clients about the health of their carriers while anticipating more stable prices after a long soft market.

The massive federal bailout loan for American International Group has prompted nervous buyers to shop their accounts and demand more due diligence about the financial soundness of their underwriters, the big brokers say.

In addition, the plight of AIG and other insurers reporting deteriorating results for the third quarter has prompted talk among brokers that the steep soft market is nearing an end.

However, in the recently concluded third quarter, commercial insurance prices were still heading down by double-digits, although the pace of decline was slowing.

Commercial insurance rates on average declined 11 percent in the third quarter, compared to 13.3 percent the year before, according to the Council of Insurance Agents and Brokers' quarterly survey of insurance intermediaries.

Midsize accounts (those producing commissions and fees between $25,000 and $100,000) saw the biggest change, from a 15 percent drop in 2007 to a 12.1 percent decline this year. Prices for large accounts were down 13.2 percent compared to 15.9 percent last year, while small accounts saw rates drop an average of 7.8 percent, compared to 2007's figure of 8.9 percent.

When the 95 surveyed brokers were asked how much premium rates had changed over the last three months, according to line of business, 53 percent said terrorism coverage showed no change in price, with 39 percent noting the same for surety bonds, and 36 percent citing a stable flood insurance market. Only 7 percent said rates were unchanged for marine coverage, while only 9 percent noted a stable market for commercial property and general liability.

Most brokers see the current market stabilizing overall, with price drops at least decelerating, and some lines or individual accounts possibly seeing increases.

Greg Case, president and chief executive officer of Chicago-based Aon Corp., confirmed during the firm's third-quarter analyst conference call that rate declines persist but appear to be slowing. “From our standpoint, [pricing] will continue to decrease or become stable, with an outlook still to be determined.” he said.

For his part, J. Hyatt Brown, chair and CEO of Daytona Beach, Fla.-based Brown & Brown, told financial analysts that “we are no less optimistic about the future than we have ever been. However, what we know is that the economy is the joker in the deck, and for the next year, going into 2009, it is going to be difficult.”

“We are running into a head wind that is fairly strong from the economy, but once that turns around, things are going to be fairly good,” he added.

Mr. Brown went on to say there is some sense the soft market might be bottoming out, but it remains soft overall. Carriers are beginning to push back on pricing in some areas, but have not been too successful at sustaining either flattening or rate increases.

Some lines will face more challenging times than others, thanks to the sinking economy, brokers indicated. For example, the economic downturn could mean an uptick in workers' compensation claims as workers file injury claims when layoffs start. “Once that line starts to turn, a lot of things happen [with pricing],” said Mr. Brown.

A report titled “Marketplace Realities and Risk Management Solutions,” from Willis HRH out of New York, noted that the losses insurers will experience in their investment portfolios would seem to set the stage for “moderation in the soft phase of the insurance cycle…”

Pam Ferrandino, executive vice president and casualty practice leader with Willis HRH, told National Underwriter that despite the financial turmoil, there is no evidence of a marketwide turn in pricing at this time. Some lines, such as directors and officers liability and property-catastrophe, may be seeing some jumps in pricing, but even those increases are not significant at this point.

One factor supporting increased competition and price softening is AIG's situation, which has prompted risk managers to ask brokers what their alternatives are, she noted, adding there is no shortage of carriers looking to be opportunistic in this environment. However, overall the flight to quality continues, as does underwriting discipline, she added.

In an interview with NU during last month's CIAB annual leadership forum in Las Vegas, Eric J. Andersen, CEO for U.S. Retail at Aon, said toward the end of the year the market appears headed for a general flattening, but its direction would depend on the status of AIG and how buyers view their position with the carrier.

Any movement away from AIG because of the uncertainty generated by its parent's federal bailout, according to Mr. Andersen, would represent a flight to quality. “Price is secondary,” he noted.

Marsh gave its view during one of its “New Reality of Risk” Webcasts, on “Managing Your Insurance Portfolio in Time of Economic Distress.”

Among the speakers was Sean Mooney, chief economist for Guy Carpenter & Company, the reinsurance brokerage arm of Marsh & McLennan, who said the ongoing credit crisis did not appear to be affecting reinsurers. Capacity is ample and profitability remains strong, he noted–all indicators that the soft market would continue, at least in the near term.

Lou Ann Layton, a managing director in Marsh's D&O Liability Practice, noted that clients are concerned about the financial strength and ratings of carriers as they aggregate coverage for risks. If the client is not comfortable with a particular carrier, a decision needs to made whether the percentage of coverage that insurer controls must be reallocated, or if that insurer should be totally removed from the mix. “If the insurer cannot pay the settlement, it puts the officers in direct harm,” she noted.

During a financial analyst's conference call discussing MMC's third-quarter results, President and CEO Brian Duperreault said while there may not be price hardening, rates will at least stabilize. He said the driving force will be asset based–such as with AIG, where the insurance units by themselves are doing fine, but the market turmoil has created the need for better underwriting returns on the business.

“You can't raise capital in this current market. You have to be more careful about it,” he noted, adding that a major loss could do serious harm to insurers, which might not be able to replace capital.

Insurers will have to buy more reinsurance and not cut prices as they have in the past to protect their capital, he continued. “Generally speaking, it should stop the declines, but it is difficult to predict the magnitude of it–when it will appear and how long it will go,” he said.

“We are at the floor of the soft market,” according to Tim DeSett, senior vice president and head of the Financial Solutions Advisory Group for Kansas City, Mo.-based Lockton Inc.

He told NU that clients with good loss histories will be able to make a case for a fairly priced renewal, but insurers might show growing reluctance to engage in loss-sensitive programs.

One issue arising from the credit crisis is the expense the insured could incur from a carrier's requirement for the collateralization of deductible programs, warned Mr. DeSett. In the past this was not a significant expense, but with increased interest rates and difficulty obtaining loans, this could become a weighty issue for buyers.

Risk managers might be forced to buy more insurance than they had in the past, he explained, simply because it is more affordable. Conversely, because earnings have dropped, some buyers may have less money to spend on insurance.

“This is not only an insurance exercise, but a financial exercise,” said Mr. DeSett, explaining the insurance purchase decision must take many more elements into account.

“More than ever, all of this is coming to the forefront hand-in-hand with coverage,” said Mr. DeSett. “They are making sure that their insurance program is as up-to-date and aligned with what the corporation is trying to do as much as possible.”

Special Reports /

Brokers See Rate Hikes Slowing Down, But Don't Expect Major Hardening Ahead

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