Soft Market Speeding Up, But Most Carriers Don't Race Off A Cliff On Prices

In charts prepared for CIAB by Lehman Brothers Equity Research, the rate decline now stands at its deepest for all sizes of accounts–although bigger buyers are still getting a better deal, CIAB found.

Small accounts (defined as commission and fees of less than $25,000) experienced the smallest average rate decline at 8.9 percent. Midsize accounts ($25,000 to $100,000) fell 15 percent, while large accounts (over $100,000) had the largest drop at 15.9 percent.

This contrasts with just a year ago, when third-quarter rate declines had not yet reached double-digits–with the average at 5.3 percent.

However, last year coastal accounts were the exception to the rule, with buyers in catastrophe-exposed areas still struggling to find coverage or facing hikes in both rates and deductibles. But this year's third quarter saw a very different picture in disaster-prone areas, with brokers indicating that some price declines were taking place–although deductibles remained high.

Another indicator of how dramatic the change has been from last year is the number of brokers reporting increases on their accounts.

For instance, 6 percent of responding brokers in the 2006 third-quarter survey said large accounts saw increases of 10-to-20 percent. Three percent said rates for large accounts grew 20-to-50 percent, while 1 percent saw hikes on large accounts between 50 percent and 100 percent. A year later, no brokers reported increases on any size account.

Another telling indicator of the market's direction is MarketScout's "Market Barometer," which for October showed an average property-casualty rate decrease of 15 percent, compared with 9 percent a year earlier.

In interviews at last month's CIAB annual meeting in White Sulphur Springs, W.Va., brokerage and insurance carrier executives agreed that the market is softening but were not universal in their view on how deep the drop is.

Charles M. Kavitsky, chief executive officer of Novato, Calif.-based Fireman's Fund and president of the carrier's parent, Allianz of America, said while there is softening, he does not believe the industry will go through the same tumult as in past declines because of greater underwriting discipline.

In addition, he cautioned it would be a mistake to believe the entire market is soft, noting that homeowners insurance is one exception, and that there are some lines and regions not seeing double-digit cuts.

Robert H. Courtemanche, president of personal insurance for Fireman's Fund, noted that while there is a lot of competition among the few players in the high-end personal lines market, there was still hesitancy over accepting risks with a huge catastrophe exposure. Insurers, he said, are examining their models and pulling back in those areas, playing it smart by watching their aggregate exposure.

In a speech before CIAB members, Michael G. Cherkasky, president and CEO of Marsh & McLennan Companies, warned that "while it is clear markets are making money and combined ratios are healthy, the prevailing rate basis is declining across all lines. 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 noted rate declines could 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 added. "In the clamor for efficiency, we cannot lose those characteristics."

"There is no doubt we are in a soft market," declared Cynthia Beveridge, executive vice president and national director of property and casualty broking groups for Chicago-based Aon Corp. However, she characterized the current market as softening by "modest declines, not rapid. [Rates] are not falling off the slope."

She said all figures pointed to a very profitable 2007 for insurers, but that has not led to undisciplined underwriting.

The markets, she pointed out, are seeing a lot of new entrants in a number of areas, creating intense competition, which is leading to price declines.

The choice of booking multiple lines is something buyers are looking for, noted Ms. Beveridge, and that desire is adding to insurer competitiveness. For a broker like Aon, she called this an opportunity to "streamline the process and show our value" to clients.

Aon President and CEO Gregory C. Case told National Underwriter that "rates overall continue to retreat," while the markets are striving to understand the dynamics behind those downturns. He predicted prices "will begin to level out a little bit."

Stephen P. McGill, CEO of Aon Risk Services, America, said ultimately while the market keeps softening, the industry must be prepared for the unexpected.

Moderating concern over catastrophe exposures is the discipline insurers now display, reviewing models more closely and recognizing the fact that rating agencies will not tolerate the aggregation of too much catastrophe exposure on their books, he said.

"From a buyer's perspective, it's a very attractive market right now," said Don Bailey, CEO of Willis North America in New York. Eighteen months ago it was a "nuanced market," but all that has changed, with insurers broadening terms and conditions. His assessment is the current cycle will last at least two more years.

While working to capture market share, insurers have yet to come to terms with contract certainty, which would mean greater claims certainty, he suggested. "Contracts are built in ambiguity," Mr. Bailey remarked.

The relationship between buyer and broker should be a partnership, he said, with carriers using their imagination to create insurance vehicles and the broker being a part of the creation on behalf of the client. "Carriers should look to be more innovative in a soft market," he said.

One benefit of a soft market for brokers is that it helps a firm focus on operations, he said. "The soft market forces us to run a better business."

"The market is extremely soft and getting softer," observed H. Wade Reece, chairman and CEO of Raleigh, N.C.-based BB&T Insurance Services Inc. "Unless there is some untold catastrophe, its hard to see a change soon." His own prediction was that the current cycle would last at least three more years.

And while there are signs of softening on what has been an understandably hard market for cat-prone risks, Mr. Reece noted, some coastal accounts are still hard put to get cheaper or broader coverage.

Wholesale brokers–BB&T is the owner of the wholesale firm CRC Insurance Services–are being affected by the soft market, Mr. Reece explained. However, they are focusing on new opportunities in the face of increased competition from the retail markets. "If you keep with the priorities, you'll be okay," he said.

J. Powell Brown, president of the rapidly growing, acquisitive Brown & Brown insurance brokerage firm based in Daytona Beach, Fla., said he believes the soft market will be around for at least two years. He feels no single catastrophe would cause a market hardening, but price increases could be seen in a geographic location and line wherever a catastrophe hits.

However, Brown & Brown is feeling soft market pressures more acutely than others because of Florida's Citizens Property Insurance Corp.–the state's property insurer of last resort–which is now in a position to underprice much of the private market.

After the legislature this year lowered the threshold for admission to the plan and froze rates in an effort to make property insurance more affordable, B&B saw some dramatic softening that has materially affected its bottom line, he noted.

Mr. Powell said that without Citizens' rate reductions, he feels the firm's Florida business–which is a significant part of its earnings–would have been positive instead of falling into negative territory.

The major problem with having Citizens in the mix is that it brings unpredictability to the market, he said, explaining that private carriers are predictable in their pricing, and competition can deal with rate increases.

He said he felt the state's action was unnecessary since capital was beginning to return to the Florida market and bring in more insurers, which would have naturally led to lower prices.

In the short term, he said, the government's plan appears to have worked, thanks to the absence of any hurricanes striking Florida, but the current system is not a long-term solution, he concluded.

David Zuecher, chairman, president and CEO of Wells Fargo Insurance Services in Chicago, noted that while markets are generally softening, the Midwest has been in a soft market for more than three years, and the commercial market there continues to see rate declines.

One strategy to maintain profitability in a soft market is to keep retentions high, noted Samuel L. Jones, president and CEO of ABD Insurance Services, now a subsidiary of Wells Fargo Insurance, based in Redwood City, Calif. "It's a lot less expensive to sell to your current customer than to find a new customer," he said.

"Yes, there is a soft market that is intensely competitive, as it always is, but now there are more decreases," observed Albert R. "Skip" Counselman, chairman and CEO of RCM&D.

However, he believes this soft market will not be as severe as past cycles. He feels decreases are not going through high, double-digit drops as in the past. The reason for this, he suggested, is insurers are much more attuned to risk and are better disciplined about what to write.

"They are trying to keep price fluctuations in a narrower band," Mr. Counselman observed. "Most clients want stability, but they also want a fair price."

He added that "as far as the [general] marketplace goes, I believe the soft market will continue through 2008. Most say, and I agree, that this cycle may be briefer and not as violent as the past."

Part of the reason insurers are not rushing off a cliff to write business is they have more data than ever on which to base their decisions, he noted. At the same time, there is more pressure from rating agencies and shareholders on financial performance and to make reasonable returns on equity, he said. Thus, while an individual insurer may deviate from the pricing norm, for the most part, he does not expect cuts to be dramatic.

Stability may return by 2009, he said, but a serious catastrophe or terrorist attack could change the current soft market direction and restore a hard market in a hurry.

Price difficulties remain for Northeast coastal property accounts, he noted–a major market for the Baltimore-based RCM&D. The fact that there have been no hurricanes hitting the United States in the past two years has been a great help.

"If one occurred, I don't know how we would have continued writing [Northeast] property accounts," he said.