'Terrible Trio' Of Price-Cutting Carriers Prolong Soft Market, But Who Are They?

The chief executive of the online insurance exchange MarketScout contends that three property-casualty insurers are keeping rates low at a time when business realities call for price-hardening, but he refuses to name the offending carriers.

“Every sensible economic indicator tells us rates should be increasing, yet there are still three large, admitted, publicly-traded insurers clamoring for premium, seemingly at any rate and continuing to prolong the soft market,” said Richard Kerr, chair and CEO of MarketScout, in a scathing commentary accompanying the release of the Dallas-based firm's monthly “Market Barometer” survey on insurance market pricing.

“In our new financial world, the CEOs of the terrible trio are ultimately going to have some explaining to do,” he observed.

But Mr. Kerr repeatedly demurred when asked in e-mails and over the phone by NU to identify the three anonymous companies he is taking to task.

Many critics and competitors have pointed fingers at American International Group, accusing it of underpricing risk in exchange for volume to compensate for reputational damage from its parent company's financial woes and federal bailout–a charge the carrier has adamantly denied on a number of occasions.

May's barometer survey showed overall p-c pricing down 6 percent in May–a slight moderation compared to a 7 percent decline in April, but far less extreme than the 11 percent drop recorded in May 2008.

In his longest commentary to date accompanying his monthly barometer report, Mr. Kerr said that, “historically, the end of the soft market is punctuated with last-gasp, deep rate reductions by a few desperate insurers, signaling either the end of the soft market or the end of an irresponsible insurer.”

Either way, he observed, “once these irresponsible underwriters are reined in, we should be on the way to rate increases.”

However, he warned, “until that occurs, the soft market will continue.”

“We project the turn will come by year-end because all but the terrible trio are making appropriate underwriting decisions,” he said in his statement.

“Even the E&S market is refusing to chase rates down, sitting on the sideline as the terrible trio slash each other to bits,” Mr. Kerr added. “Our guess is prudent insurers are waiting to pick up the fallout when the terrible trio have their day of reckoning.”

He also advised stock analysts to be more probing in their questions with insurance company CEOs, and to seek more detail about underwriting practices.

“To protect their investors, stock analysts need to go well beyond reviewing published financial data and ask more probing questions during investor conference calls,” Mr. Kerr suggested. “One simply cannot fully analyze an insurance company without reviewing actual underwriting and pricing practices.”

He complained that “seldom are questions asked about real-life situations,” such as:

o “Why did you write Joe's Plumbing for 50 percent of what your four competitors quoted?”

o “Are your underwriters on a production incentive based on growth or underwriting profit?”

o “What are the results of your internal underwriting audits for each line of business?”

o “Do you reprimand or remove underwriters who fail their audit?”

o What is your particular secret to growth during this period of economic decline and declining rates?”

Mr. Kerr also said that “of course, asking questions without hard evidence of the irresponsible underwriting conduct may not have much impact.”

The best source for such market intelligence is brokers, although many will be reluctant to divulge information for fear of losing access to these insurers, he noted.

“The brokers know where the soft underbelly of the market lies,” said Mr. Kerr, suggesting that “stock analysts should talk to brokers to determine which insurer has the hottest hand.”

“You may not get much information from some brokers, lest they lose their money tree. However, there are plenty of real-life case examples if you simply do the research,” he added.

Brokers cannot be blamed for the continuation of the soft market due to “irresponsible premium quotes” by their carriers, said Mr. Kerr, because they are acting in the best interest of their clients to get the best price.

However, he concluded, shareholders are ultimately paying the price. “In the end,” he said, “the poor management of the insurer will create the most pain for the Mom and Pop shareholders who are investing in household names.”

The May barometer survey found most coverage classes were down by 4- or 5 percent. The exceptions were businessowners coverage, general liability and umbrella excess liability (all down 6 percent), workers' compensation (down 7 percent) and fiduciary (falling 3 percent).

“MarketScout's computations are promulgated from raw data and further supported by hundreds of in-person surveys conducted by The National Alliance for Insurance Education and Research,” the company noted.