NU Online News Service, Nov. 16, 1:53 p.m. EST

The casualty-insurance market, while still soft, appears to be at the bottom of the pricing cycle, and on the property side, insurers continue to transition away from soft-market conditions, driven by catastrophe-loss increases, according to insurance broker Lockton.

In a Nov. 12 Market Update, Mark Moreland, executive vice president and director of risk management at Lockton, says declining underwriting results and pressure on investment yields have weighed on the casualty market through the 2011 first half. “As a result of these losses, carrier combined ratios declined to [110.5], which is the worst six-month result since 2001,” Moreland says in the market update.

Moreland adds that reserve releases have “masked the true underlying carrier underwriting performance and may have contributed to extending the soft market.” But he notes that, based on conversations with carriers and other sources, “the industry has lost its reserving buffer, and further releases are not expected to be significant, if they occur at all.”

Meager profitability, Moreland says, coupled with record levels of surplus “has driven down the industry return on capital to 1.7 percent through the first six months of 2011,” the lowest return on capital since 1986 and below the 9.4 percent average over the past 25 years.

“The dilemma for insurance companies is clear,” says Moreland. “They must figure out how to deploy their capital at higher rates while the overall level of capital is placing pressure on prices.” He adds that while share buybacks, dividend increases, and merger and acquisition activity are plausible scenarios, “price discipline is the only real panacea.”

On the property side, Jim Rubel, executive vice president and director, property/energy for Lockton, says insurers are reducing capacity and raising prices for property-catastrophe risks.

“For catastrophic risks,” Rubel writes, “market conditions are now difficult, meaning that buyers could face dramatic price increases.”

But he says this is not yet a true hard market, where capacity is not available at any price. “It may not take much more, however, to trigger a hard market,” he adds.

As on the casualty side, catastrophe losses and investment losses are the culprits for the pricing swing in property.

Rubel also notes the new Risk Management Solutions catastrophe model as a factor leading to reduced capacity and increasing rates.

“The impact of these factors, however, has been kept in check because there is still enough capacity in the property catastrophe market to create competitive conditions, and reinsurance rates have stayed relatively stable in spite of the big catastrophe losses,” Rubel notes. He says policyholder surplus has stayed steady at $559.1 billion in the 2011 first half, down only $0.2 billion from the first half of last year.

Rubel says, “But it may not take much to change today's difficult market into a hard market. This year's catastrophe losses have eroded much of the market's cushion. Some estimates are that it would take only a $20 billion single event to trigger a hard market.”

From a buyer's standpoint, Rubel says insureds must restructure their programs at renewal to keep price increases at a minimum. “This means reducing reliance on any one insurance carrier,” he says. “By using less capacity from a greater number of insurers, buyers increase the competition for their business and strengthen their market leverage.”

Special Reports /

Lockton Market Updates Show Prices Bottoming Out for Casualty, Property

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