The 'Invisible' Hard Market?

What happens when you raise your insurance rates, maybe even by double-digits, but you don’t see any boost to your top- or bottom lines? That’s what you call an “invisible hard market”–a very clever phrase coined last week in an insightful but disturbing state of the markiet speech delivered by Brian Duperreault, president and CEO of Marsh & McLennan Companies.

You see, the problem, according to Mr. Duperreault, is that while property-casualty insurers are finally poised to shrug off the soft market and start raising prices again–spurred on by rising reinsurance costs and their own investment losses–since the economy is contracting, carriers are not likely to see any positive impact.

With firms either closing facilities, laying off workers or closing up altogether, there is less insurable exposure out there, so while the price of coverage may be going up, the actual premium written may end up flat or even down this year. That means insurers could end up treading water financially.

We are in the beginning stages of a hardening market, but countervailing economic forces are turning this into our first invisible hard market, Mr. Duperreault told the annual joint meeting of the Association of Professional Insurance Women and the New York Chapter of CPCU.

When our market turns, it usually happens very clearly, he said. Normally, when we stand in the doorway of a hardening market, we know it. But because of the macro-economic factors at work today, he explained, even though prices are going up, we cannot see the normally positive effects for the industry

With available risks to insure on a steep decline, he said, that means no dramatic change in the top linewhich, combined with falling investment income, means no dramatic impact on the bottom line, either. As a result, he observed, the instant gratification that usually comes from a hard market wont be available this time around.

Still, for the moment at least, [insurance] supply has gone down more swiftly than demand, due to staggering investment losses for many carriers, he observed, forcing insurers to raise prices to compensate.

He said the reinsurance sector is leading the charge into a harder market, reporting that for Jan. 1 renewals, rates are 10 percent higher for national accounts and up 15 percent for regional risks, on average. The higher cost of reinsurance will put additional pressure on primary carriers to raise their own prices to keep pace, he added.

Warning that p-c insurers are navigating in unchartered waters, Mr. Duperreault said that while we may be entering a harder market, we must continue to operate as if were still in a soft market. That means vigorous expense control, claims management and underwriting discipline.

Predicting that the positive effects of a hardening market for insurers will become visible eventually, he said a significant catalyst will be neededsuch as a reinvigorated economy or a rebounding investment market.

He also warned, however, that a major disaster loss could change the p-c landscape in a hurry, prompting a much harder market and stiffer rate hikes virtually overnight.

The p-c industry remains well-capitalized, despite the huge hits weve taken on the investment side, but our cushion is far thinner, noted Mr. Duperreault. With capital very hard to come by after the huge financial losses absorbed by hedge funds and other private equity investors, it will be hard to expand capacity if a significant disaster strikes, leaving us vulnerable to a major catastrophic event, he explained.

Still, he said, things could be worse. Indeed, he added, the good news is that the much-maligned p-c industry has weathered this storm. Weve come through in far better shape than banking has.

He lauded the insurance industry for its more responsible approach to risk. As insurers, we think more about holding risk than trading itas opposed to banks, which packaged reckless subprime loans and passed them off to investors in what turned out to be toxic securities.

We are professional gamblers, he said, but at least we know the odds on most bets we make.

Conceding that were in for some very tough times, he told the packed house to thank God you still have a job and work in an industry thats basically okay and well-capitalized and which generally did not have to run to the Feds window for money.

Outside of a handful of carriersmostly on the life insurance sidethat are scurrying to tap federal funds from the Troubled Asset Relief Program, he said we work in an industry thats needed, relevant and which stood the test of time.

We have been through some odd markets, but never an “invisible one” before. Still, I sense Mr. Duperreault pegged this one dead on. Insurers, which usually thrive in a hard market, are in for a rough ride this time around.

What do you folks think?