There is no doubt in the minds of the biggest insurance brokers as well as one leading consulting firm that the current soft market cycle is here to stay for awhile–lasting at least through the end of next year, and possibly well beyond that.
In interviews here with National Underwriter during the annual Insurance Leadership Forum held by the Council of Insurance Agents and Brokers, there was no disagreement that we're in a buyer's market on all but catastrophe-exposed risks–although few were willing to characterize the softening market as extreme just yet.
Barring a very severe catastrophe, the consensus appears to be that the cycle will not reach its nadir before late next year, with rates likely to keep falling for as long as two more years. "You could not have crafted a more attractive market for clients," said Don Bailey, chief executive officer at Willis North America.
Broker assessments were echoed in a report released last week by Advisen Ltd.–"The Soft Market: How Low Can It Go?"–which predicted that insurance premiums could keep falling for years without some major speed bump along the way.
"There is no doubt that we are in a soft market," said Cynthia Beveridge, executive vice president and national deputy leader at Aon Brokerage Group, although she characterized the current market as one of "modest declines, not falling off the slope."
"The markets are intensely competitive, as they always are," said Albert R. "Skip" Counselman, chairman and CEO of Riggs, Counselman, Michaels & Downes Inc., based in Baltimore. "More often than not, accounts are seeing decreases at renewal."
In a speech during the CIAB's opening general session, Marsh & McLennan President and CEO Michael G. Cherkasky said insurers are profitable and investors are finding the industry a good place to put their capital–while warning that "all is not rosy."
"While it is clear that markets are making money and combined ratios are healthy, the prevailing rate basis is declining across all lines," he said. "The result is a great marketplace for our clients and great opportunity to bring our competitive industry instincts out in both brokers and underwriters."
However, he said, rate declines could once again commoditize the buying and selling of insurance. "This is an industry that for hundreds and hundreds of years has relied on knowledge and judgment," he said. "In the clamor for efficiency, we cannot lose those characteristics."
Mr. Counselman said this cycle is different from prior softening markets thus far in that rates are only down slightly, "not as far off the charts." While some could still buck this trend by writing a renewal at a rate that makes no sense, he added, 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.
Aon's Ms. Beveridge echoed that assessment on underwriting discipline but added there are too many unknowns to be certain how long that might last. For example, she said the industry still does not know how the subprime mortgage crisis will affect directors and officers coverage, while some natural disaster could dramatically alter the market's direction. "Today, what we need to have is better service and higher standards for our clients," she said.
Aon President and CEO Gregory C. Case told NU that "rates overall continue to retreat," while the markets are striving to understand the dynamics behind those downturns. He predicted that prices "will begin to level out a little bit."
Stephen P. McGill, CEO of Aon Risk Services, America, said ultimately while the market continues softening, the industry must be prepared for the unexpected. He said one significant change is insurer outlook on catastrophe exposures, with more discipline displayed thanks to better modeling and rating agency scrutiny.
Don't expect the market to turn around anytime soon, according to David Bradford, an analyst who authored the Advisen Ltd. report. "Unless there is a gargantuan catastrophe or series of catastrophes, the soft market is going to continue to go on its path for quite awhile to come, until the losses start to eat into surplus."
Absent a major catastrophe, he added, it could be "years of soft market conditions before it turns around." The last soft market was about a decade long, so there's certainly a precedent, according to Mr. Bradford.
"Capacity just keeps growing," he said. "As long as it keeps growing, the pressure will continue on rates, and there is really no end in sight at this point in time."
Advisen said that although buoyed by sharply higher windstorm and earthquake premiums, commercial insurance pricing has given up nearly 40 percent of the gains achieved in the 2001-to-2003 hard market. All indicators, the firm said, point not only to a continuation but to an acceleration of competition.
"The questions now are how far and how fast rates will fall, and how much damage will be done to balance sheets before the soft phase of the insurance pricing cycle bottoms out," Advisen said.
The report also said that underwriting discipline–touted as sufficient to stem the tide of falling rate levels–might give way to market pressure.
"Everybody talks about underwriting discipline," Mr. Bradford said. "And eventually, almost everybody crumbles. It's really economic forces. At the end of the day, the power of supply and demand is a pretty strong influence."
(Additional reporting by Caroline McDonald.)
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