Will 2012 be the year the market turns?

Robert Cubbin: While we are seeing some bottoming out and even price hardening in certain specific product lines or market segments, we still do not foresee a turn in the market cycle in the near future. There is still a lot of capacity and strong competition present in the market. One issue we all are watching closely is the industry adoption of the RMS 11 model. Insurers are continuing to stall on the implementation of RMS 11 into their own underwriting models. However, the reinsurers are seeking to charge insurance companies potentially significant rate increases based on the updated U.S. wind model at Jan. 1, 2012. This could have significant impact on potential rate increases across the board. However, we are uncertain at what level the current economy can shoulder this burden.

Robert H. Rheel: It needed to turn 2 years ago. Something has got to give. Since the 2008-09 financial crisis, bond yields have been very low and this has affected returns on new money invested for all insurance companies. Yet insurance market rates have not reflected this change. Why? Because this financial reality takes time to filter through to investment returns and some accounting conventions in the meantime flatter the returns with the creation of unrealized gains. It’s like a train with the engine pulling the rest of the cars into the turn. The train car you are sitting in determines when you will feel the turn. It is clear, however, that even the last cars are feeling the effects of a sustained low-yield environment. For insurance companies, if lower investment income is a given, then underwriting income needs to make up the shortfall for return on equity targets to be met. This can only happen if either, so to speak, cars crash less often, or premiums rise. Insurance companies would be foolish to bet on the former but they can achieve the latter.