P&C Insurance Renewals Remain Soft, But Signs Indicate Market Turn Has Begun

While directors and officers liability policies renewed at higher premiums on average, the increase was due to hikes being quoted to financial sector companies–a segment that has been hit by the subprime mortgage meltdown and credit crisis.

Overall, D&O prices increased 2.9 percent–a dramatic reversal of the 6.4 percent average decrease in the second quarter of 2008. Excluding financial services companies, however, D&O policies renewed with a 4.1 percent average decrease.

Meanwhile, property premiums fell less than 1 percent, compared to a 6.1 percent drop in the second quarter of 2008.

Workers' comp rates fell 2.8 percent on renewals, compared to a 1.7 percent drop in the second quarter last year. General liability posted a 1.1 percent drop, compared to a nearly 5 percent decline in 2008.

Rates continue to drift downward, despite the loss of $81 billion in policyholders' surplus in 2008 and the first quarter of 2009, with deteriorating investment markets the principal cause of the surplus decline, according to figures reported by the Insurance Information Institute.

"Insurance capacity is disappearing at a startling rate, but the market nonetheless remains competitive," David Bradford, executive vice president at Advisen Ltd. and editor-in-chief of the RIMS Benchmark Survey, said in a statement.

However, he added, "as a result of the recession, the demand for insurance capacity also has decreased, which has kept pressure on rates. Companies are downsizing, which means that there is simply less to insure."

Falling demand has prolonged the soft market, but leading indicators tracked by Advisen Ltd.–most specifically the ratio of policyholders' surplus to U.S. Gross Domestic Product, which measures the supply of insurance capacity relative to the demand for that capacity–suggest the market is close to its bottom, Advisen noted.

RESERVES TAPPED OUT?

Meanwhile, property and casualty insurance companies may be forced to raise prices soon as increased harvesting of reserve redundancies is expected to leave a limited cushion for 2009, according to a recent Moody's report–"U.S. P&C Insurers Reap large Reserve Redundancy."

"The U.S. p&c industry has largely harvested reserve redundancies embedded in the balance sheet at year-end 2007 through earnings in 2008, thus leaving limited cushion for 2009," the report said. "Moreover, pricing has continued to decline over the last several years, causing accident year loss ratios to migrate higher."

Moody's said that during 2008, the p&c industry posted nearly $14.3 billion in favorable reserve development, or about 2.8 percent of prior year-end carried reserves, representing the fourth straight year of favorable reserve releases for the industry.

Improvement over prior years stemmed from more favorable market conditions, price increases, better underwriting discipline, favorable loss cost trends, and relatively few natural catastrophe losses in 2006 and 2007, Moody's said.

However, the rating agency added that it expects insurers to report less benefit in their 2009 earnings from reserve releases and, in some cases, to even post deficiencies.

As a result, the report said "current results suggest that over the medium term, insurers will have little choice but to raise prices or to see their combined ratios continue to migrate higher."

INSURER OUTLOOKS

Edmund F. "Ted" Kelly, Liberty Mutual's chair, president and chief executive officer, said most underwriters remain disciplined and are "walking away from inadequately priced business."

"Pricing is firming up a little bit, except maybe in middle market; [while] personal lines is doing very well," according to Mr. Kelly. "We will continue to plan and hold tight on underwriting standards and pricing for a long time since we have generally a conservative view, if not negative view of the economy."

Commercial lines remain competitive, he added, with brokers pushing for more decreases, and one insurer (which he did not name–although in past statements he cited AIG's commercial insurers) "that remains extremely aggressive on price." However, he said price competition is primarily focused on keeping business, while new business remains hard to obtain.

Property prices are beginning to bottom out, he noted, while property-catastrophe exposures are getting increases of 10-to-20 percent. In the face of an anticipated hard market, Mr. Kelly said the company is seeing more requests for multiyear deals.

William R. Berkley, chair and CEO of W.R. Berkley Corp., said he believes earning conditions within the insurance industry point to inevitable price increases occurring by the end of this year or the beginning of 2010.

Speaking to financial analysts during a conference call to discuss the company's second-quarter earnings, Mr. Berkley predicted that conditions are set for a hard market, noting his company is already seeing signs of increases.

"This is the first time we are seeing more increases in areas than not," said Mr. Berkley, reporting that June rates rose 0.2 percent–the first time the company as a whole has seen increases since 2005. He said there is little doubt prices will be up further before the end of the year.

The most disciplined companies are beginning to turn down high risks and are raising prices as they begin to seek underwriting profit, Mr. Berkley related.

"You can't live on release of prior-year reserves," he said. "There are many companies that are still disciplined and doing the right thing that are looking at reality and behaving appropriately. Unfortunately, there are many that are still not."

He said volume is down the most in business where the company is aggressively raising prices. "That's just the way life is," he remarked. "We are prepared for that."

He said there will be some event to turn the market hard–which could be a rating agency downgrade, adding that because of their failure to foresee problems with the surety business, rating agencies will have to get tougher with marginal insurers.

Mr. Berkley and other Berkley executives also noted that standard line insurers are beginning to back away from business that traditionally belongs to excess and surplus line carriers. Believing E&S risks are underpriced and not properly underwritten, many standard lines carriers that were "absurdly aggressive," as one executive put it, are now exiting. "The standard market is no longer eating into the [E&S] market," said one Berkley executive.

"We are pretty pleased with the way things are going," said Mr. Berkley, adding that his company is more optimistic than it was six months ago.

Evan G. Greenberg, chair and CEO of ACE Ltd., in a teleconference with analysts reported property reinsurance prices up 5 percent, and rates overall for international p&c insurance up 2 percent.

"In the United States, right now I think the market will continue to firm for us, but slowly," said Mr. Greenberg. "In the U.K., same thing. Australia seems to have accelerated a little more rapidly. The continent of Europe is firming more slowly, but it also got softer more slowly. It's a more orderly and slower-to-react market."

Mr. Greenberg said that "beyond that, I can't read the tea leaves right now," noting that in addition to careful expense and investment management, the insurer is "repositioning our products and marketing programs to have greater appeal to individuals and companies in recessionary times."

(Additional reporting by Daniel Hays, Phil Gusman and Mark E. Ruquet.)