Analysts See Long, Hard Market Ahead
The hard commercial insurance market could run longer and deeper than some carriers and agents might expect, as insurers look to bring their companies back to profitability, a group of financial analysts warned.
The assessment of the state of the market came during the 15th annual Professional Liability Underwriters Society conference held in Orlando, Fla.
"Jan. 1 will be very tough on casualty [pricing]," predicted Vincent J. Dowling, managing partner at Hartford-based Partners Securities LLC. He added that no one at this point understands "how stiff" price increases are going to be.
His assessment was supported by Jay A. Cohen, first vice president at Merrill Lynch & Company Inc., and Ronald W. Frank, an analyst with Salomon Smith Barney, both based in New York City.
Mr. Dowling said that this hard market cycle could last longer than previous ones only because the financial holes on insurance company balance sheets are bigger than before and the "implosion of European" financial markets are just beginning to be felt here.
"We are only in the third or fourth inning. There is a lot to be played out," Mr. Dowling suggested.
"It is not a question of how long [the hard market] will last, but is there the discipline to keep it at its peak cycle," observed Mr. Frank.
He said that once carriers have reached the level of return they need to cover insurance losses, the companies need to maintain that level to continue underwriting profitability and bottom-line gains over the long haul.
However, he warned that, historically, once insurance companies reach their peak, underwriting discipline lasts only two-to-three years at most before another soft market cycle begins.
There are a number of factors fueling the hard market besides the terrorism attack of Sept. 11, according to Mr. Cohen. Prices were beginning to go up before then, he noted, but since the attacks the erosion in interest rates, the drop in the stock market, and claims inflation have all eaten into insurance company earnings. All of these pressures, coming at the same time, have combined to create the hard market situation and give it staying power, he surmised.
To get adequate returns on capital, Mr. Dowling suggested, insurer combined ratios will need to be in the low-to-mid-80sfar below the 92-to-93 percent combined ratios some insurance executives have said they will need to achieve to maintain profitability.
"The math just doesnt work," Mr. Dowling said of the higher combined ratio assessments. "There is a little disconnect going on."
Regarding the major insurance brokers, Mr. Cohen said that they are profiting from the fruits of the hardening market more immediately than the companies. Their business interests are more diversified than those of insurers, and when pricing levels off, brokers can still expect gains from subsidiary income sources. Insurers, on the other hand, he noted, are not seeing quite the same immediate gains, but will see improved bottom lines as double-digit premium increases continue to be handed down.
While insurance companies have some work to do to get their financial houses back in order, none of the analysts felt that there would be major company insolvencies. However, carriers might continue to restructure or shut down units as they leave unprofitable lines they never should have entered because they lacked the expertise to underwrite them, Mr. Frank said.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 25, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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