Brokers See Cat Cover The Rate Slide Exception

WHITE SULPHUR SPRINGS, W.VA.–A year after what seemed like a cataclysmic time for insurers, executives said they feel prices are heading into a period of stability, with continued downward trends in most areas except property-catastrophe.

They addressed the issue at the 93rd annual Insurance Leadership Forum of The Council of Insurance Agents & Brokers meeting here this week.

Overall, executives said premium pricing will continue its downward trends in the United States and some said they thought pricing would decline at a rate of 5-to-10 percent.

Martin P. Hughes, chairman and chief executive officer of Chicago-based Hub International Limited, called the condition of the market status quo, and did see things worsening through 2006 to 2007.

“People are always focusing on the anomalies,” the brokerage CEO said. He voiced the opinion that overall, the insurance industry is in pretty good shape in a decent economy. However, he did say that brokers will struggle with organic growth in the continued downturn.

Although this is the third year of the market's downturn, Mr. Hughes said he did not believe the situation would approach the soft market of the 1980s and 90s due to pressures by rating agencies for insurers to keep their financing in order.

“If a carrier got knocked down to a 'B' rating they could survive in the past, but if they get a 'B' rating today they might as well close their doors,” he said, because banks will not certify any of the carriers' notes. “Rating agencies are being very tough on carriers today.”

In an interview prior to the CIAB's meeting, J. Patrick Gallagher, president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co., was more pessimistic about the market's future.

“It is going to soften like crazy,” said Mr. Gallagher.

Despite last year's losses from the hurricane catastrophes–about $60 billion, or 15 percent of the market–companies did make money, and a very benign catastrophe year means fantastic returns, he noted.

The dramatic change in earnings, he said, would spell “a very soft market like the mid-90s; that is my prediction,” he commented.

However, he would not go so far as to predict dramatic softening on catastrophe risks, saying “there is strong resolve” among the reinsurance segment not to take down rates despite new capital and 300-to-400 percent increases.

“I would hope to see some softening, but that is a hard one to predict,” said Mr. Gallagher. “It is such a fluid market, one never knows.”

David H. Priebe, head of global specialty operations and CEO of the European arm of reinsurance broker Guy Carpenter & Company, a subsidiary of New York-based Marsh & McLennan Companies, said the pressure from the ratings agencies has made reinsurers do some fundamental restructuring.

Changes at reinsurers, he said, have translated into reduction of capacity and brought new capital into play. Despite their best efforts, however, he said catastrophe risk demand remains undercapitalized by $8 billion in peak catastrophe zones, primarily the southeastern United States.

“It will be interesting to see in 2007 if the industry will remember the lessons of the past and fall back into a trap that would cause them structural problems,” he observed.

Outside of the catastrophe areas, he said the market would remain stable with a 5-to-10 percent decrease on a broad basis.

When asked why the industry did not see an overall spike in pricing after last year's catastrophe events, he said unlike after 9/11, the industry was not in the middle of an upswing in pricing.

Technology has also played a major role, he noted, helping to focus price increases to individual markets with detailed knowledge that was unavailable in the past. It also helps that capital can be allocated more quickly to certain markets, making across the board increases unnecessary.

Going into 2007, he felt catastrophe insurance would stabilize and remain at 2006 midyear pricing levels.

On the question of what effect a major hurricane before the end of this season could have on the markets, Mr. Priebe said that if losses “are in line with perception it may reaffirm that the system is not broken. A loss could validate [industry] assumptions and pricing.”

“If you can have a loss, and the industry still sees a return after a substantial loss, it could be a positive development for the system.”

For his part, John L. Lumelleau, president and chief executive officer of Kansas City, Mo.-based insurance broker Lockton, said insurers feel like they have dodged a bullet this year with the hurricane season.

While they may prove to be financially successful this year, in catastrophe areas, they are being cautious in their underwriting.

“No one knows what next year will be like,” he said.

As for the overall market, Mr. Lumelleau said it appears to be stable, and he would not categorize it as soft. However, he said, the major concern of insurers will be not to lose market share.