NU Online News Service, Dec. 8, 2:37 p.m.EST

In a report focusing mostly on the energy-insurance market,insurance broker Willis took time to discuss the globalinsurance-pricing cycle, stating a market turn, which many feel isalready beginning, is not necessarily guaranteed to occur justyet.

Willis notes that at the end of 2008, many prognosticatorsbelieved the financial crisis would trigger a market hardening.“Indeed, some industry spokesmen jumped the gun towards the end of2008 and declared that the soft-market conditions had come to anend. What actually happened, though, was the opposite,” the brokersays in the report's introduction.

Willis says back then, new capital entered the market and theeconomic crisis reduced buyer demand.

This time around, with the Eurozone crisis and fragile economypresenting similar, though not identical, challenges, Willis saysthe onset of a hard market may once again be restrained. The brokernotes that one difference between today and 2008 is “the bigquestion mark that hung over the future of AIG at the end of 2008,which forced AIG to retain business and offered its rivals thechance to compete for AIG's business.”

Although this is not a factor today, Willis says that “demandcan be expected to fall once again if the recession bites, which isnot a good sign for insurers who want to put up their prices.”

Willis notes that the property market remains well capitalized.And while reinsurers are expected to put some upward pressure onrates during the Jan. 1 renewals, the market has still not seen a“game-changing” event that would cause a market turn.

The report cites the following September comments by MartinSullivan, deputy chairman of Willis Group and CEO of Willis GlobalSolutions: “The current levels of overcapitalization may be reducedby losses and poor investment returns, but that should not returnus to the bouts of capital starvation that drove market behavior insome of the earlier hard markets.”

ENERGY MARKET SEES COMPETITION; UNDERWRITING LOSSES

Speaking to the energy-insurance sector, Willis says loss ratiosfor most insurers continue to run at levels of 100+. Some insurersare withdrawing from the market, Willis says, but this has not yethad a significant impact on supply and demand levels.

The report notes that underwriters are being directed to achieverate increases, but “whether market forces will allow them tosucceed remains to be seen.”

Global underwriting capacity for the power-generation sectorstands at close to $4 billion, with the capacity coming mostly fromthe general-property market and specialist power insurers. ButWillis says there are signs of a change in appetite within thesector.

“In Lloyd's, there has been a shift in the alignment ofcapacity…,” the report says, noting that Lloyd's appetite for“lead” capacity at a primary level has diminished for internationalpower business. Instead, Willis says, “Where Lloyd's capacity forthis sector now tends to feature is on first excess of loss layers,i.e. capacity typically deployed above a primary limit of, say, $10million to $25 million or more.”

Rates remain considerably lower compared to the previous hardmarket in 2003 for the power market, Willis says, noting thatprices have come down by around 43 percent since then. “During thisperiod, the sector has consistently posted underwriting losses, andthis has continued in 2010-2011,” Willis says.

The industry has been hit recently by both “mega claims”events—such as damage at the Vasilikos power station in Cyprus froma munitions explosion at a nearby naval base in July 2011—andcontinued attritional losses.

Willis says, “Overall, in terms of underwriting returns, thepower sector has not performed well over the past five or sixyears, and underwriters would like to introduce targeted rateincreases. However, as long as the market remains well capitalized,there seems limited scope for underwriters to achieve them.

“Perhaps in recognition of this reality, some underwriters arechoosing to place the emphasis on risk engineering as a means ofdriving down the sort of attritional losses that seem to have beena constant presence in the power sector.”

The Willis report is called “PowerMarket Review, December 2011.”