Watch Out For Speed Bumps As Softening Market Gains Momentum

No agent or broker would be surprised to hear that the property-casualty market is softening, except that property-catastrophe prices are soaring in disaster-prone regions and construction risks remain difficult to place. End of story, right? Not quite. In conversations with agents from different regions of the country, characterizing the state of the market is not as simple or universal as one might think.

So, before you race off with any general assumptions, beware the many speed bumps along the way.

For example, California is seeing dramatic improvements in what just a few years ago was a crisis in workers' compensation, which was being blamed for strangling the state's economy.

However, coastal areas are in crisis–even Alabama, which only took a glancing blow from Hurricane Katrina.

In the nation's heartland, an agent in Kentucky sees signs of a softening market, but worries that as the industry commoditizes more lines and downplays the importance of agents, insurers run the risk of doing a disservice to the consumer.

The bottom line is that while some national trends are in play, the state of the market remains a very local issue.

“The markets are awful,” declared Alex Soto, president of Insource Inc., in Miami, Fla., and president-elect of the Independent Insurance Agents and Brokers of America. “South Florida is the worst I have seen in 34 years in business.”

He said this is the first time he has found no market to place some windstorm risks–and that includes surplus lines carriers, whose job it is to fill coverage gaps. He said insurers will not entertain a quote on old structures, buildings without storm-shutters or impact-resistant windows–any building unlikely to weather a hurricane well.

At least for personal lines customers, there is the state's wind pool residual market–however, noted Mr. Soto, “there is no 'market of last resort' in commercial [insurance].”

As a result, many commercial buyers are taking the self-insurance route as they deal with the dramatically escalating cost of premiums–if they can find coverage at any price, according to Mr. Soto, who worries that many commercial and even personal lines customers might simply go bare and hope for the best.

Outside of property-catastrophe issues, the market is a “little soft,” but leaning more toward flat in pricing, he noted. Some lines–such as general liability and umbrella–have not seen big reductions, and there have been few reductions in personal lines. Yet professional liability premiums have gone up substantially for lawyers handling class-action cases, Mr. Soto observed.

However, he feels that the situation over the availability and affordability of property-catastrophe coverage is coloring the future of all lines in South Florida.

“Florida is an anomaly because it is not following the trend of the softening market in the rest of the country,” Mr. Soto observed. “The issue of catastrophe coverage is such a huge story here.”

Ultimately, he said, a national solution must be found to spread these exposures, or else risk burdening future generations with a mounting federal debt to pay for emergency federal disaster aid for today's mega-catastrophe victims.

Despite suffering limited losses along its Gulf Coast from Hurricane Katrina, Bobby Friedrich, a principal with Friedrich Company Inc.–an independent agency in Mobile, Ala.–said the capacity problem in his state appears to be worse than Florida's.

Insurers are pulling back from risks along the coast south of Interstate 10–about 25 miles inland, he explained. The state's wind pool market of last resort is inadequate to the demand and surplus insurers are not showing much interest, he added.

“It's not a complete constriction, but it is getting more severe as we approach hurricane season,” he observed.

One of the major problems with the state's Alabama Insurance Underwriting Association is that many home values exceed the $350,000 limits the residual insurer is permitted by law to write.

“We can't insure along the beach because the value of homes is too high,” he noted, adding the situation is affecting the region's real estate market, with realtors unable to market homes because buyers can't get coverage. “Real estate is comatose,” he said.

For answers to the pressing need for property insurance, he just hopes there will be some openings in the middle of hurricane season, or perhaps the London market would be willing to pick up the business–at a price. “We're telling customers we're doing the best we can,” said Mr. Friedrich.

On the positive side, Mr. Friedrich observed, there is “no spillover to other lines. It's a competitive market with zero underwriting.”

In the nation's heartland, Donna Pile, owner of A.G. Perry Insurance Agency in Lexington, Ky., and incoming president of the National Association of Professional Insurance Agents, said the hurricane-fueled property-catastrophe crisis materializing along the Gulf Coast has not translated into a market issue for independent agent carriers in Kentucky or the Midwest.

That doesn't mean those areas are free of disaster speed bumps, however, as potential losses from hail and tornado exposures in Tennessee, Kentucky and Ohio have created coverage problems. “There has not been a dramatic change in rates, but it's still early in the season,” she noted.

Homeowners insurance is stable in her state, but in Kentucky, carriers are changing their underwriting criteria, requesting more information and using a greater number of risk factors (such as credit scoring) in pricing. The result is higher premiums–especially for risks with prior claims.

Generally, commercial prices are softening and carriers are very aggressive in their marketing, she observed. Insurers are willing to tag more coverage onto a policy package to attract clients, she noted, including adding workers' compensation.

However, one drawback from this is customers are getting very competitive price quotes from rival agents and brokers, putting account retention in jeopardy–even though it is not clear if the cheaper quote is for the same coverage terms and limits. “We don't know if we are comparing apples to apples,” she observed.

Construction risk remains very, very expensive, and habitational exposures for rental or multicomplex dwellings are a problem. “If they have a policy, they better not give it up yet and go shopping for another one,” she advised.

On the personal lines side, auto is “extremely competitive,” she said, as insurers fight to boost their share with their own direct market advertising–intentionally or not competing with their own independent agents as well as rival carriers.

On property, she said the line is basically flat, but trending down overall.

Ms. Pile said her biggest issue with insurers and the industry is the education of consumers. On personal lines auto, she believes carriers are commoditizing the coverage to such a degree that consumers believe it is the same as buying a loaf of bread.

“We call it progress, and maybe it is, but I'm waiting for the other shoe to drop,” she said. “If we assume that everyone can do this without the expertise or advice from an agent, then what are we actually creating?”

On the commercial side, the companies' desire to grow their business without worrying about individual volume commitments in the post-contingency fee world could be a good thing for independent agents, she added–although she noted that some are working to put agents into buying groups to achieve economies of scale.

Scott Hauge, owner of Cal Insurance in San Francisco and a member of the Independent Brokers Association of the West, said the major issue of just a few years ago–workers' comp–which was blamed for crippling the state's economy, is no longer a crisis. The state implemented reforms that have driven down the average renewal rate 42 percent, he said–noting prices could fall even further.

However, some clients complain they are not seeing significant decreases. The reason, he explained, is that because the economic climate has improved, these companies are seeing their businesses grow–and, in turn, they hire more people. They don't realize that as payrolls grow, the net effect is their insurance costs have remained the same.

He worries, however, that all the good work can come undone by legislators or ballot initiatives seeking to change the permanent disability schedule, which provides limits on workers' comp payments.

The schedule needs some tweaking, he conceded, but if the whole system is thrown out, carriers “are in trouble” and the system would be thrown back into crisis.

Construction also remains a big problem in California, Mr. Hauge noted–a situation “getting progressively worse, especially on the residential side.” The problem concerns California's liberal construction defect laws that allow homeowners to sue for defects long after a home is built.

Primary carriers are not writing this market, and it is exclusively underwritten in the surplus lines arena, he noted.

As far as last year's hurricanes affecting the state's catastrophe market, he said pricing for earthquake coverage has soared more than 40 percent–but capacity is not yet an issue.

Elsewhere in California, there is an aggressive market on commercial lines–especially businessowners policies, according to Mr. Hauge. Umbrella is one line that has experienced some increases, although moderate, but he insisted that “all in all, with a few exceptions, it is a pretty aggressive market.”