As we approach the end of the third quarter of 2009, we see strange things happening in the insurance market place.
Clearly, insurance companies have not made an overall profit in 2008 and the beginning of 2009. The losses have come from a loss of value of investments, normal attrition losses and a continuing pattern of catastrophic events, mainly weather related.
At the same time, reduced commercial activity caused by the recession has caused a drop in written premium as exposures have reduced. An example would be the auto companies that once had significant premiums calculated from their payrolls and sales. Today, the businesses are smaller and some are even out of business, so the premiums are greatly reduced or even eliminated.
On top of this, insurance carriers are facing increased costs from compliance issues from steadily rising reinsurance rates. Throughout the soft market, insurers have bolstered their results by takedowns of reserves established when rates were higher.
But reserves are finite, and the time will come when these surplus reserves will come to an end and annual results will show the true picture.
As these circumstances come to pass, the logical action of insurers is to increase rates. But is it not happening–at least not yet on a wide scale.
That's why there seem to be different markets emerging–by class, territory, and, to some extent, size. These different markets were clearly delimitated after Hurricane Katrina. Property risks exposed to catastrophic wind losses had their rates significantly increased, while general liability, professional and other classes were not really affected. We believe the availability of data has to some extent caused insurers to apply rate increases only to those risks that may have the exposure rather than to the market in general. This phenomenon has not happened to the same extent before and it presents agents and brokers with some difficult choices.
Market #1: Classes of business
Property rates seem to be less liable to premium reductions, perhaps because the losses occur quicker and therefore the payout is sooner.
General liability classes, on the other hand, are still declining, driven by reduced business activity but also perhaps because of the slower payout of claims and the possibility of building up IBNR.
Executive liability, on the other hand, is subject to significant rate increases because of claims arising from the current economic cycle.
Workers' compensation may also be affected because experience has proved that claims and loss of time payouts increase in times of high unemployment.
Market #2: Territory
Where the property risk is located makes all the difference. Rates are stable or slightly down in areas where there are no wind, flood or quake risk, while some of these catastrophe-prone territories are seeing 15 percent to 25 percent increases in these rates.
Market # 3: Size
Size makes a difference. Bring big bucks to the table and insurance rates will go down, especially on long-tail business. The only time this statement is not true is on mega-buck property exposures in tough territories, where rates are going up.
Insurance is designed to pay the losses of the few with the premium of the many. Clearly this is not happening–it depends on what the risk is, where it is, and its size.
It is suggested that this may change the fundamental nature of the insurance business as the hard and soft cycles are not quite what they used to be. Traditionally, every class of business was affected by some rate increases. Now, a withdrawal of capacity everywhere causing rising prices is unlikely. Instead a more selective hard market occurs, affecting only those risks that exposures to the highest potential of loss.
David Price is executive vice president and chief underwriting officer at Burns & Wilcox. He can be reached at 248-539-6012 or by email at dprice@burns-wilcox.com.
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