The top story of 2007 was headlined, “Prices Plummet, With No Letup In Sight,” and not much had changed by the end of the first quarter this year.

Indeed, the headline on NU's April 21 cover remained grim for insurers: “No Light Seen At The End Of The Soft Market Tunnel.” The story reported that price-cutting was continuing, with capacity still abundant and catastrophe losses low, and no turnaround anticipated in the near term.

While we are living in a very different world today–marred by a credit crunch, contracting economy, massive layoffs and a plummeting stock market–it is not at all clear that property-casualty carriers and their distributors can expect a seller's market for commercial insurance any time soon.

Back in March, MarketScout's “Market Barometer” reported an average p-c commercial rate decrease of 12 percent. By October, that had moderated below double-digit drops to 9 percent, but the pricing direction was still south.

There are a few segments that have shown signs of prices at least hitting bottom, with higher rates close at hand.

Indeed, the highest catastrophe losses in three years–twice as much as the previous two years combined, led by Hurricanes Ike and Gustav (see page 19)–will no doubt put upward pressure on what had been a weakening property-catastrophe market.

In addition, the fallout from the subprime mortgage debacle threatens to hike premiums for directors and officers at firms whose stock prices tanked thanks to reckless investments in subprime-related securities.

Professional liability rates for all those on the front lines of the economic crisis–from financial advisers, to real estate salespeople, to mortgage brokers–will also no doubt be heading up.

Reinsurers–running out of capital sources and facing greater demand for their products–are also expecting prices to head higher, which could force primary carriers to follow suit. Reinsurer volume is already up, as U.S. property-casualty reinsurers over the first nine months increased net premiums written by 6 percent, compared with 2007, according to the Reinsurance Association of America (although the sector's combined ratio deteriorated 10 points to 104.2).

But thus far, no widespread rate turnaround is evident. For most risk managers, this remains a buyer's market, with price cuts perhaps leveling off, but no real hard market turn evident at this point.

Overcapitalization continues to hold prices in check, as evidenced by the fact the industry was able to take an estimated 8 percent, $42 billion jolt to its surplus without having to radically raise rates.

A slowing economy certainly has been a drag on the industry as well, with exposure growth heading into reverse as more buyers scale back operations or go belly up. That means there is still more insurance supply out there than there is demand–a phenomenon likely to continue as the business sector keeps shrinking into 2009.

Capital sources have dried up with the demise of some hedge funds and the devastation of major investors, meaning that rates could skyrocket for certain lines and selected areas if another major catastrophe hits, many in the industry warn. There simply won't be an easy way for insurers to replenish their coffers under the current fiscal circumstances if a disaster strikes.

The industry's fundamental weakening should become more clear when fourth-quarter results start coming in early next year. Towers Perrin estimates that for 2008, industrywide surplus could drop by 15 percent–or about $80 billion. If that doesn't sober up underwriters, nothing will.

However, insurers are sounding increasingly frustrated by their inability to unilaterally hike rates–with much of their wrath directed at American International Group. Major players including Liberty Mutual and ACE have openly complained about AIG supposedly cutting rates to maintain market share to compensate for reputational damage following the federal bailout of its corporate parent–allegations AIG has vehemently denied.

Is AIG myopically undermining what should be a hardening market, or is the troubled firm merely a scapegoat for an industry desperate to boost its top line to offset increasingly weak investment returns?

The jury is still out.

Special Reports /

#3: Economic Woes Do Not Stop Soft Market

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