Data Shows Hard Market Melt; Rate Hikes Average 12%

Mr. Kerr said that looking at the Marketscout composite as a barometer over the past years, it has "ranged into the high-20s [and] now its heading south."

An increase is still shown, he said, because there are still some product lines such as insurance agents errors and omissions, medical malpractice, pollution and windstorm that are "still going to be considered hard and they continue to rise. But those are individual lines. When you take the composite, two years ago every product line was increasing 10-to-30 percent and some would be at 60 percent."

Mr. Kerr said numbers he has seen from the National Association of Independent Insurers and Insurance Services Office jibed with data from the Marketscout user group–"supporting our position that, overall, the industry is healthy.

He said unless there is under-reserving or another cataclysmic event, he expected to see admitted companies coming back in markets they have avoided, which would be a benefit for independent agents, who have been forced to go through wholesale brokers or some form of intermediary to supply their customers.

"In the admitted market, they might make 15 percent [in commissions] as opposed to using a wholesale broker and make 10 percent," Mr. Kerr said. Apartment buildings would be one line of coverage affected, he said.

He said, during the hard market, wholesale brokers have proven their value and while their business may lessen now, "the good ones will continue to flourish."

Mr. Kerr said the current situation is definitely not a soft market and while the cost of property insurance renewals may be reduced, medical malpractice is still seeing 40 percent gains and workers compensation, which is seeing declining rates in some states, is going up in California, New Jersey and Florida.

In his view, a soft market will not arrive until the investment portfolios of insurance companies start getting better returns. Meanwhile, the softening market means "billions of dollars of savings for insurance buyers stimulating economy."

Dan Carmichael, chief executive officer for Ohio Casualty Group in Fairfield, Ohio, said the Marketscout findings meant "the hardest part of the market is over, but its still firm."

"Most of the competition were seeing is more on the commission side–companies offering higher commissions to move books or accounts, or incentives to CSRs [customer service representatives]."

As for overall market softening, "Its not excessive. Were not seeing decreases overall. Its more than one market anyway. For some lines, its still very hard to try and place professional liability and D&O. For small commercial the hardness is less hard."

Finally, Mr. Carmichael noted that amongst insurers, "everybody is still getting sufficient price to cover their loss costs."

Mike Murray, assistant vice president for financial analysis with Jersey City, N.J.-based ISO, said the company believes "reports of the demise of the hard market have been greatly exaggerated. We believe its still hard, but losing its momentum.

The hard market, he said, began in July of 1999 and is now in a "mature stage–like a hurricane with diminishing wind.

ISOs MarketWatch program, which examines real commercial lines policies characteristics over 12 months and compares them at renewal time, tracked upward rate trends on renewals until they reached 19 percent in July 2002.

"It has been on a downward trajectory ever since, with the latest increase [coming in at] just 9.9 percent as of the end of the first quarter," he said.

Mr. Murray said the hard market is losing strength, but rates are not generally flat or down. Still, "there are selected markets in a type of coverage or geographic area where markets may be softening," he said.

The question, he said, is whether the next phase will be a soft landing with "a reasonable period of profit thats good for insurers and buyers."

"The only problem with that scenario is [that] weve probably never seen it."

The historical precedent, he said, is for the hard market cycle to be followed by a soft market. At this point, Mr. Murray said, "we dont have a projection for when the hard market will end."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 10, 2003. Copyright 2003 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.