Just a year after what seemed like a cataclysmic time for insurers, top brokerage executives gathered here expect prices to keep falling in most lines except for still-dicey property-catastrophe exposures.
Overall, premiums will keep falling in most U.S. lines, at a rate of 5-to-10 percent–but this is to be expected given a lack of hurricane losses thus far this year, strong profit reports and an influx of capital into the industry, noted a number of major players here at the 93rd annual Insurance Leadership Forum of the Council of Insurance Agents & Brokers.
Martin P. Hughes, chairman and chief executive officer of Chicago-based Hub International Ltd., called the condition of the market status quo, although he does see rates falling through 2006 and into 2007.
"People are always focusing on the anomalies," said Mr. Hughes, adding 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 pricing downturn.
Although this is the third year of a generally softening market, Mr. Hughes said he did not believe the situation would approach previous free-falls due to pressures by rating agencies for insurers to keep their finances 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," because banks will not certify any of the carriers' notes, he said. "Rating agencies are being very tough on carriers today."
In an interview prior to the CIAB meeting, J. Patrick Gallagher, president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Company, was more pessimistic about the market's future. "It is going to soften like crazy," he said.
Despite last year's record hurricane losses, companies did make money, and a very benign catastrophe year thus far means fantastic returns ahead, he noted. The dramatic change in earnings, he said, would translate into "a very soft market like the mid-90s–that is my prediction."
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 rate 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, president and CEO of reinsurance brokerage Guy Carpenter & Company, said the pressure from rating agencies has made reinsurers do some fundamental restructuring.
Changes at reinsurers, he said, have translated into reduction of capacity and brought new sources of capital into play. Despite their best efforts, however, he said catastrophe risk demand remains undercapitalized by $8 billion in peak disaster zones–primarily the Southeast.
"It will be interesting to see in 2007 if the industry will remember the lessons of the past or fall back into a trap that would cause them structural problems," he said.
Technology has also played a major role, he noted, helping to focus price increases on 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 price increases unnecessary, he added.
Going into 2007, he said 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 CEO of Kansas City, Mo.-based insurance broker Lockton, said insurers feel they dodged a bullet with this year's mild hurricane season. While 2006 may prove to be very profitable, in catastrophe areas carriers remain 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, which could lead to more aggressive price-cutting.
In an interview after the conference, Grahame Millwater, chairman of Willis Re, said a major driver of the market is the desire by carriers to diversify their books, after pressure from rating agencies and new models identified more exposures in coastal areas than many thought they had.
However, "companies are hungry for business," he said, which has prompted discussions with brokers about the pursuit of new markets. That hunger, he added, has aggravated the current pricing situation.
One mitigating factor, he said, is that on the reinsurance side, there will be pressure on Jan. 1 renewals to equal July 1–especially increases on catastrophe coastal risks in the United States.
Overall, he observed that the general market is stable, with some softening in specific lines, but "it is still a difficult U.S. catastrophe market."
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