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A hard market may not be arriving anytime soon, but several insurance executives at last week's S&P conference suggested that the industry is in good shape, even in the midst of a struggling economy, while others warned against complacency.

In spite of asset losses and catastrophe insurance claims, property-casualty carriers have not felt the kind of pain that fuels a hard market, according to Jay Cohen, a managing director in the equity research division of Bank of America-Merrill Lynch, one of many offering their assessment during the Standard & Poor's Insurance 2009 conference here.

“When I talk to [insurance company] management [teams], they talk about the oncoming hard market,” saying things like, “we're well-positioned; we've got capital; we're excited about prices going up over the next year,” he reported.

“Usually, you don't see a turn in the market if everyone's so excited about it,” Mr. Cohen said, noting that a turn is coming when managements say, “we've got a lot of losses,” or, “our balance sheet is significantly impaired [and] we've got to pull back quite a lot.” That's when insurance prices will really start to go up dramatically, but “we don't have that kind of pain yet” in the form of higher loss and combined ratios, he observed.

Mr. Cohen said that for the companies he follows, the average combined ratio was 88 for the first quarter, or 93 on an accident-year basis. “That's not so bad,” he noted.

He also said price declines are beginning to slow, attributing the change in part to the investment losses insurers have experienced, as well as lower interest rates.

“That's a good thing. It didn't take 120 combined ratios for that to happen,” he said.

W. Marston Becker, chair and chief executive officer of Max Capital Group, speaking at a later session, said that “you have to give the industry credit [because] a year ago, you were reading about nothing but rate declines in casualty business.”

Today, there are reports that some prices are flat and some are down, and while there are still no significant rate hikes outside of those for professional liability coverage for financial institutions, the moderation in premium declines is happening “before the industry hits the rocks,” Mr. Becker said.

“Never before have we had any meaningful inflection in rate without severe combined ratios,” he said.

“There may be something to” assertions that there's better price monitoring and improved risk management going on in the industry today, he said, adding that “the industry perhaps is trying to take out the peaks and valleys of the cycle.”

The cycle has not been eliminated, “but perhaps you don't have the low-lows before you have the high-highs” in pricing, Mr. Becker added, noting that this is a better situation both for clients and insurers.

Mr. Cohen also expects more price stabilization going forward, noting that companies are routinely monitoring pricing by agent, by region and by product–a clear difference from the 1990s, when they had no price monitoring tools at all.

“They have better data and they're looking at the data,” he said, adding that he believes they are demonstrating the discipline to translate the data into action.

Like Mr. Cohen, David Havens, managing director of Hexagon Securities, said he believes the industry is not yet in a hard market. “Even a 'stealth hard market' [description] may be a little too optimistic, but it's still a good market,” he said.

Mr. Havens was referring to a discussion that took place during an earlier panel of insurance company CEOs talking about the concept of a “stealth hard market,” in which prices are going up but exposures and premium volume are declining as insured businesses slow down or shut down in a recessionary economy.

During that session, Jay Fishman, chair and CEO of Travelers, noted that the “stealth hard market” description first came from a broker, suggesting that such a market is an acceptable one for a carrier. (The broker was Brian Duperreault, CEO of Marsh & McLennan Companies, who coined the phrase “invisible hard market” during a speech he gave in January.)

For a broker, “a dollar of premium is a dollar of premium, whether it's exposure-driven or rate driven,” Mr. Fishman said. For insurers, a dollar of rate puts 85 cents on the top line (assuming a 15 percent commission), while a dollar of exposure “falls cents to the bottom line.”

“So it may be that the top line is flatter” even though rates have been moving up since second-quarter 2008, because workers' compensation payrolls and sales revenues–exposures for liability lines–have fallen at the same time, he added.

“But the impact on [profit] margins of that improving rate is significantly more powerful than a dollar of exposure in any line of business,” said Mr. Fishman, whose company will replace its one-time parent, Citigroup, representing the financial services sector on the Dow Jones Industrial Average.

From a profit standpoint, “we'd trade a point of rate for a dollar of exposure any day,” according to Mr. Fishman. “I don't think from a market perspective it feels like a 'stealth' hard market. It feels like a pretty good time.”

Also eschewing the notion of industry cycles generally, Mr. Fishman said that “we don't perceive that the market is as mystical as it all goes down or it all goes up.”

“There's a tendency to lump all classes of business together,” he added, explaining that lines such as auto and homeowners, small-commercial and large-account business all have their own characteristics. Prices for small-commercial business, for example, never went down as much as other areas, he noted.

“There actually are managements, there are strategies and there are analytics. People do sit and review profitability of the businesses, and they take strategies to the marketplace,” he said.

Market participants today are “more active than passive,” he said, like Mr. Cohen attributing part of the change to the fact that analytical tools are “dramatically different than they were 10 years ago.”

“Prudent companies are allocating capital to individual lines of business, making assessments of profitability and managing their field organizations aggressively,” Mr. Fishman said.

The Travelers CEO noted that pricing in certain lines began to improve starting in the second quarter of last year, and although pricing was still negative, “the trend began to move up”–accelerating through the first quarter of 2009. “I'm happy to take the last quarter [and] the next month,” he said.

However, Constantine “Dinos” Iordanou, president and CEO of Arch Capital, is decidedly uncomfortable with the current state of affairs. “We shouldn't celebrate a deceleration in rate reductions. Rate reductions are still rate reductions, even at a slower pace,” he said. “We're in an environment that after 35 years in the business I don't like because people get satisfied.”

Considering the fact that new money invested today will not produce the kinds of returns from assets that insurers have traditionally experienced, he said this situation “requires us to get away from escalating rate reductions and actually get positive rate” in lines beyond catastrophe-exposed lines (where rates have been pushed up because by diminished supply).

SELF-INFLICTED PAIN

While analysts indicated the industry hasn't had enough pain yet to turn the market, several speakers–including Thomas Upton, an S&P managing director who moderated the opening session of conference–suggested the industry has begun the process of inflicting pain on itself by releasing loss reserves for prior accident years too early.

The releases are material for some long-tailed casualty lines, such as workers' comp, Mr. Upton said, referring to an S&P analysis contained in a report the rating agency published in January.

Evan Greenberg, chair and CEO of ACE Ltd., agreed that S&P was highlighting a legitimate area of concern, even though he believes that industry reserve levels are currently adequate in the aggregate.

Releasing reserves based on early developments is an optimist's view, according to Mr. Greenberg. “Good news comes early in the casualty business. The bad news always comes late,” he said.

“I do think some companies have released reserves early in an effort to goose earnings,” he said, suggesting that “it may come back to bite them.”

In addition, Mr. Greenberg believes insurers are being overly optimistic in the initial loss ratio selections they make to set reserves for recent accident years.

“The 2008 accident year will prove in the aggregate to be deficient,” he asserted, noting that “it's normal within the cycle” for insurers to start pegging current loss ratios below where they'll ultimately play out.

“I don't think this one is any different, all the vigilance of third parties notwithstanding,” he said.

Special Reports /

Insurers Should Expect No Pain, No Gain When It Comes To Hard Market Pricing

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