Insurers Entering First 'Invisible Hard Market,' MMC's Duperreault Says

The property-casualty industry is entering an “invisible hard market” as exposures disappear in a contracting economy, which hides the bottom-line benefits of rising prices, Brian Duperreault, the head of Marsh & McLennan Companies warned.

“We are in the beginning stages of a hardening market, but countervailing economic forces are turning this into our first 'invisible' hard market,” according to Mr. Duperreault, MMC's president and chief executive officer.

“When our market turns, it usually happens very clearly,” Mr. Duperreault noted in his recent speech here before the annual joint meeting of the Association of Professional Insurance Women and the New York Chapter of CPCU. “Normally, when we stand in the doorway of a hardening market, we know it.”

But other factors are at work, he added, combining to undermine any positive impact. Thus, he said he coined the phrase “'invisible hard market,' because we cannot see its normally positive effects for the industry.”

With available exposures to insure on a steep decline during a deepening recession, he said, “that means no dramatic change in the top line–which, combined with falling investment income, means no dramatic impact on the bottom line, either.” As a result, he observed, “the instant gratification that usually comes from a hard market won't be available this time around.”

Still, for the moment at least, “[insurance] supply has gone down more swiftly than demand,” due to “staggering investment losses” for many carriers, he observed, prompting insurers to raise prices to compensate.

He said the reinsurance sector is leading the charge into a harder market, reporting that for Jan. 1 renewals, rates are 10 percent higher for national accounts and up 15 percent for regional risks, on average. The higher cost of reinsurance will put additional pressure on primary carriers to raise their own prices to keep pace, he added.

Warning that p-c insurers are navigating in “unchartered waters,” Mr. Duperreault said that “while we may be entering a harder market, we must continue to operate as if we're still in a soft market. That means vigorous expense control and claims management.”

Predicting that the positive effects of a hardening market for insurers “will become visible eventually,” he said a significant catalyst will be needed–such as a “reinvigorated economy or a rebounding investment market.”

He also warned, however, that a major disaster loss could change the p-c landscape in a hurry, prompting a much harder market and stiffer rate hikes virtually overnight.

“The p-c industry remains well-capitalized, despite the huge hits we've taken on the investment side, but our cushion is far thinner,” noted Mr. Duperreault. With capital harder to come by after the huge financial losses absorbed by hedge funds and other private equity investors, it will be difficult to quickly expand capacity if a significant disaster strikes, “leaving us vulnerable to a major catastrophic event,” he explained.

In assessing disaster exposures, Mr. Duperreault chided the industry for what he characterized as an “overreliance on modeling,” warning that “models have limits. They must be supplemented by common sense and good judgment based on your long experience in risk control.”

However, he added, despite the fact that it “looks like 2009 will be another tumultuous year for the insurance industry, the investment markets and the economy,” the good news is that “the much-maligned p-c industry has weathered this storm. We've come through in far better shape than banking has.”

Indeed, he lauded the insurance industry for its more responsible approach to risk. “As insurers, we think more about holding risk than trading it”–as opposed to banks, which packaged reckless subprime loans and passed them off to investors in what turned out to be toxic securities. “We are professional gamblers,” he said, “but at least we know the odds on most bets we make.”

Conceding that “we're in for some very tough times,” he told the packed house to “be thankful you still have a job and work in an industry that's basically okay and well-capitalized and which generally did not have to run to the Fed's window for money.”

Indeed, he noted, only a handful of carriers–mostly on the life insurance side–are scurrying to tap federal funds from the Troubled Asset Relief Program.

“We work in an industry that's needed, relevant and which stood the test of time,” he said.