Soft Market To Remain For Some Time

As long as carriers continue to practice disciplined underwriting, the indicators point to a prolonged soft market cycle, said a ratings analyst.

“We don't see a strong market hardening for some time,” said James B. Auden, senior director of insurance, property-casualty, with Fitch Ratings in Chicago.

He said companies are getting adequate returns on their underwriting, and while that continues the market will remain in its current soft cycle.

“We didn't think [Hurricane] Katrina and the events of last year warranted a broader hardening market event because rates were adequate in many areas, so there really wasn't a need for increases,” he noted.

His comments came today during a conference call to discuss yesterday's release of Fitch's review and outlook report for the insurance industry.

What concerns the analysts right now, he said, is how soft is too soft, where pricing becomes irrational and carriers no longer receive an adequate rate of return on their underwriting.

Currently, carriers are underwriting successfully, and with that success companies will look to expand their markets and possibly get into risks they have little expertise in. Carriers at that point get into trouble, he said.

“For the time being, they [companies] are more disciplined, but at some point they will revert back to historical form” and return to bad underwriting practices, he predicted.

The last true market-changing event was 9/11, which led to a true marketwide underwriting event where the industry recorded the first net operating loss in its history.

“It is still in everyone's memory, but how long that will last, I'm not sure,” he commented.

Carriers, he said, also realized then that they need to earn an underwriting return on capital and cannot rely upon investments for profits.

“You can't be satisfied with 100 combined ratio. In most segments, it needs to be 95 or better,” he said.

In its review, Fitch anticipates the industry will have a combined ratio of 92 percent for 2006 compared with 100.9 in 2005. It will also enjoy a statutory income of $71 billion, “which will smash previous industry records and represent a 51 percent increase over 2005.”

On the mergers and acquisition front, Mr. Auden said there may be some activity within the industry, but no blockbuster deals. He cautioned, however, that Fitch has not been very good at predicting such mergers.