Is the soft market nearing its end as price decreases begin to show signs of moderation and the country's financial turmoil starts to take a toll on insurance company earnings? Industry officials are split as they read their tea leaves, crystal balls and Tarot cards.
"For the last several months, rate decreases have continued. However, the decreases are moderating," noted Richard Kerr, chief executive officer of MarketScout, the Dallas-based electronic insurance exchange.
Meanwhile, he added, "the financial markets have experienced a meltdown, several major insurers are in serious trouble, underwriting results are slipping, and investment income is anemic at best. As a result, the soft market is winding down."
However, that doesn't mean price-cutting is at an end, let alone that buyers should brace themselves for rate hikes.
Indeed, MarketScout's monthly "Market Barometer" survey found that property-casualty rates overall decreased on average by 9 percent for October–down one point from September's 10 percent decrease.
Jumbo accounts (those over $1 million in premium) and small accounts (up to $25,000 in premium) both saw rates drop 8 percent in October, while medium accounts ($25,000 to $250,000) and large accounts ($250,000 to $1 million) saw average decreases slow to 10 percent for October.
While general liability decreases averaged 11 percent last month, compared to 10 percent in September, and workers' compensation rate cuts remained flat at 6 percent, all other lines showed the pace of decreases moderating by one or two points.
Still, the chief executive of Aspen Insurance Holdings cautioned against trumpeting the end of the soft market.
"I believe it is possible for the first time to be hopeful about a general upturn in market fortunes," said Aspen CEO Chris O'Kane, noting he has worked through five soft markets and four corrections.
However, during an earnings conference call after reporting a quarterly net loss of $116.7 million, he cautioned that "to be hopeful is not the same as to be completely persuaded," going on to list four preconditions for a market correction–while stating that only one or two have "even been partly met" so far.
The conditions for a market turn, according to Mr. O'Kane said, are several years of low premiums and high losses; some company failures; a cataclysmic event; and a widespread willingness of insurance company managers "to put up prices even if it results in a loss of business."
While he does believe that significant price increases will "ultimately" arrive, since a lack of investment income warrants greater attention to higher premium levels at most companies, Mr. O'Kane said the actions of one troubled carrier that he declined to name–most likely American International Group–are delaying an industrywide pricing turn.
"At this stage, we are paradoxically going through the reverse, with significant rate reductions being offered by a distressed competitor to counter the threat of lost business," he said.
In addition, Mr. O'Kane noted that the industry probably has "a year's worth of overreserving" left, suggesting that it's easier to take down reserves to boost returns than to push up prices initially. With reserve cushions still available, "things haven't been that bad so far for most people," he said.
"So maybe we see the beginnings of a turn [at] this year end [that] strengthens over the next year or so, with a hard market coming in 2010," he predicted.
Also raising the possibility that the crisis in investment markets lets up, simultaneously easing pressure on underwriting, Mr. O'Kane concluded, "There are reasons to be cautious and there are reasons to be optimistic."
"Things are definitely looking up from where they were, but I think it might be a little bit early to sound the trumpet and say the hard market is with us," he said.
Looking further down the line, any forthcoming price increases for property-casualty commercial insurance will be short-lived, but personal lines rates will continue upward, according to one financial analyst.
Meyer Shields, with Stifel Nicolaus, said that while companies were heralding the rise of prices for commercial accounts during their third-quarter financial results, absent was any discussion of how long price increases will last and what the magnitude of those hikes will be.
According to his analysis, any price increases will not be long-term because competition for new business will remain intense. Price increases now will create excess profits once the financial markets settle down and that, in turn, will reignite the soft market, he added.
He also noted that the rationale for increases has nothing to do with insurance pricing but external turmoil within the financial markets. The exception will be in the personal lines area, where the competition is less intense, he said.
Reinsurance rates are also expected to increase, he continued.
"Insurer valuations have suffered along with the broader markets, and we think the sector could do well as more signs of rate increases emerge over the next few months," Mr. Shields wrote. "Nevertheless, we think that the good news in personal lines will prove to be more sustainable than in commercial lines."
For Barometer:
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.