No End In Sight For Softening Market, But MGAs Warned To Pass On Bad Risks

Despite a heavy push for new business by insurers in the softening market, managing general agents should still be prepared to take a pass on questionable risks, an insurance executive here advised.

“Know what [business] to walk away from and what makes sense,” said Chris G. Behymer, vice president of marketing for Markel Southwest Underwriters Inc. “If you don't think it makes sense, say it doesn't, and that you'll take a look at it next time.”

Speaking here in his hometown of Scottsdale, Mr. Behymer also counseled that MGAs should prepare their staff for the point when rates inevitably begin to rise once again.

Laying out his views on insurance trends at the 82nd annual meeting of the American Association of Managing General Agents, Mr. Behymer said the driver of the current soft market is the enormous amount of capital available to insurers, employed at times in markets they don't understand.

Targets for his criticism were the tech-driven aggregator systems where, he said, no underwriter is reviewing risks before issuance of a quote or policy. With such automated systems, if the premium is at or below a certain level, underwriters might not even doublecheck the risk, he said, warning that this practice will only lead to problems later on.

“It will catch up with them,” he added.

The industry–particularly investors pumping capital into the market who do not understand the industry–are helping insurers to grow markets, but not necessarily in an intelligent and productive manner that truly reflects the risks being assumed, according to Mr. Behymer, who said that “we have to do a better job of growing profitably and consistently.”

The industry has had the good luck of not suffering major catastrophes the past two years, but higher values in catastrophe-prone areas set the stage for a spectacular loss–possibly topping $100 billion–should there be a weather-related incident in a vulnerable coastal region, Mr. Behymer cautioned.

Most of those speaking out here at the AAMGA conference do not expect an end to the soft market anytime soon. Indeed, some said they believed the cycle would not see a course change through next year and possibly the year following.

During a press conference here, AAMGA's executive board discussed the state of the market and how MGAs are dealing with softening trends.

AAMGA President Tom Albrecht said MGAs are working to get out in front of the soft market by finding new niche businesses, and have done well with that strategy despite increased competition from standard-line insurers entering the specialty markets to increase volume.

Euclid Black, incoming president of the AAMGA (see page 18 for an NU interview with Mr. Black), said the current soft market is little different from past events. The only difference he sees is the advent of technology that allows for the faster flow of information and greater efficiency.

For MGAs, the soft market allows for creation of new programs and experimentation that is just not available to them with the pressures of the hard market, he noted.

MGAs are both “entrepreneurial” and “lean and mean,” said Curtis Anderson, president-elect of AAMGA. “We've learned to tighten our belts and still make money through a soft market. We know what to do and we saw the change coming.” He added the most important asset MGAs have is the relationships they've built over the years.

In a separate interview, Alan Jay Kaufman, chairman, president and chief executive officer of Farmington Hills, Mich.-based Burns & Wilcox Ltd., said there is no market today in the United States that is more challenging than any other at this point.

The property-casualty market is soft throughout the entire country, he noted–primarily due to the combination of increased capitalization and the poor U.S. economy. The capitalization has increased the desire among standard carriers to capture more markets, while the poor economic conditions mean there is less business to write, he noted.

An example he gave is the current construction climate, where the volume of business to be written has diminished radically in the wake of the subprime mortgage crisis and slowing commercial construction sector.

Frank Mastowski, president of Montvale, N.J.-based Jimcor Agencies, said that while there is softness through many parts of the country, there still remains some capacity issues for coastal risks in New York, New Jersey and Massachusetts. There is capacity for such exposures, but he described it as a juggling act to keep up with demand.

He said it appears underwriting discipline among the standard carriers is “out the window.” The last three months of the year were very difficult at his firm, he noted, with E&S business going to standard carriers, but the past two months appear to be seeing some stabilization in pricing.

To deal with the market changes, wholesalers said they are turning to improved technology. Mr. Kaufman noted that Burns & Wilcox continues to make tech investments, without which, he warned, “you will be out of business.”

Mr. Kaufman suggested there would be no change from the soft market until 2010 at the earliest. A major catastrophe could bring a more rapid change, but without one, “it will take time,” he observed.

Detlef Steiner, chairman of Delos Insurance–a program business insurer founded two years ago with private equity capital–said the primary driver of any soft market is reinsurance capacity. Once that capacity begins to decline, through losses in investment income and increased claims activity, the market cycle will turn.

He said the poor performance in the equity markets to date means reinsurers can not allow their combined ratios to rise above 110 because they do not have the investment returns to compensate for their insured losses.

“I do not have a crystal ball, but we have not seen the bottom of this market yet,” said Mr. Steiner, projecting that “the performance will not get better–it will get worse,” lasting at least for 18 more months.

He did say that despite the soft market, program business is still seeing growth, and with 21 programs available in his own company, he is finding clients interested in placing business with him because of his firm's specialized expertise and markets.