Brokers See Problems In A Soft Market

WHITE SULPHUR SPRINGS, W.Va.–Insurance brokers at an industry meeting here predicted an extended soft market cycle and the head of one leading firm said he sees it accompanied by a variety of problems.

Michael G. Cherkasky, Marsh & McLennan's chief executive officer and president, said as the downward price pressure focuses the business on cost there is a question whether insurers have the specialists needed to settle and pay claims in the future.

Speaking at the Council of Insurance Agents & Brokers 94th annual Insurance Leadership Forum held here earlier this week, Mr. Cherkasky warned: “This is an industry that for hundreds and hundreds of years has relied on knowledge and judgment. And in the clamor for efficiency, we cannot lose those characteristics: knowledge and judgment.”

Insurers are presently profitable and investors are finding the industry a good place to put their capital, but “all is not rosy,” he cautioned.

“While it is clear that markets are making money and combined ratios are healthy, the prevailing rate basis is declining across all lines,” he told the audience. “The result is a great marketplace for our clients and great opportunity to bring our competitive industry instincts out in both broker and underwriters.”

The general view among brokers who were interviewed is that, barring a very severe catastrophe, the soft cycle will last at least through next year and possibly as long as two years into the future.

“There is no doubt that we are in a soft market,” said Cynthia A. Beveridge, executive vice president, national deputy leader, Aon Brokerage Group, but it is a market of “modest declines, not falling off the slope.”

She was recently promoted to executive vice president, national director of property and casualty broking groups.

“The markets are intensely competitive, as they always are, but this time it is with decreases,” said Albert R. “Skip” Counselman, chairman and CEO of Riggs, Counselman, Michaels & Downes Inc. (RCM&D), based in Baltimore. “More often than not, accounts are seeing decreases at renewal.”

“You could not have crafted a more attractive market for clients,” said Don Bailey, chief executive officer, Willis North America.

Mr. Bailey commented that the industry as it goes through this cycle is not using its imagination to eliminate contract uncertainty. More importantly, he said, what commercial clients seek is a vehicle that provides capital quickly in the event of a loss and does away with periods of uncertainty.

“We need more certainty in the claims area,” he said, adding that too many contracts “are built in ambiguity.”

Mr. Counselman said this cycle differentiates itself from past markets in that rates “are not as far off the charts” and only down slightly, unlike past soft cycles. That is not to say someone could write a renewal at a rate that made no sense, bucking the trend, but overall, underwriters appear to be maintaining discipline.

“Most clients want stability, but they want a fair price,” said Mr. Counselman, noting that wild price fluctuations can have the effect of undermining the industry's integrity in the eyes of consumers.

Ms. Beveridge made the same assessment of underwriting discipline but added that there are too many unknowns right now.

The insurance industry, she said, still does not know how the subprime mortgage crisis will affect directors and officers coverage, or if it will create a hardening there. A calamity could also strike that alters the direction the market is currently taking, she added.

“Today, what we need to have is better service and higher standards for our clients,” she pointed out.

Steve P. McGill, chief executive officer, Aon Risk Services America, said ultimately, while the soft market continues, the major thing the industry needs to do is be prepared for the unexpected. He said one thing that has significantly changed insurers' outlook on catastrophe exposures from the past is they are more disciplined, because of increased knowledge of exposure and scrutiny by rating agencies.

“I believe [insurers] are as prepared as they can be,” he said.

Gregory C. Case, president and CEO for Chicago-based Aon Corp., said that “rates overall continue to retreat” and the markets are striving to understand the dynamics behind those downturns, and once they do, “they will begin to level out a little bit.”

(This story was update Oct. 12 at 12:10 p.m.)