No Celebration In Sight For Producers As Tough Economy Keeps Market Soft

But that relative tightening of rates appeared to have more to do with economic concerns than the kind of tough underwriting that would spell the onset of a hardening market, top brokers contend.

"If a hard market is coming, it's up the road a bit," said CIAB President Ken A. Crerar in his group's second-quarter report. "The pricing appears to be more a result of the weak economy than capacity."

That view was borne out in the third quarter, as rate declines deepened once again to an average price cut of 5.8 percent.

"Suppressed demand and appetite for business continued to drive competitive pricing in the market during the third quarter," said Mr. Crerar in a statement. "It was still very much a buyer's market as carriers chased market share. A significant upward turn in pricing remains elusive for the foreseeable future."

The soft market direction seems to be defying business logic, according to a report from Advisen: "Planning for 2010: The Recession Will Keep Commercial Insurance Premiums Under Pressure."

"Like the zombies in the classic horror film 'Night of the Living Dead,' the soft insurance market should be dead and buried, but it continues to lurch on, terrorizing underwriters and brokers," wrote Dave Bradford, Advisen's executive vice president, in his report.

Underwriters were plagued with poor underwriting and investment results that translated into a 59 percent plunge in net income for the first half of 2009, with policyholder surplus $56 billion below the beginning of 2008, which under normal circumstances should summon a turn in the cycle, Mr. Bradford noted.

Instead, the economic crisis–prompting weak sales, bankrupt business, shuttered properties and falling payrolls–has kept premium rates falling, "which is more bad news for insurers and especially for brokers already struggling with lower commission income," Mr. Bradford pointed out.

A report from Moody's Investor Service–"Insurance Brokerage Outlook"–cited three challenges facing insurance intermediaries: the soft property and casualty market, the weak global economy, and large debt on the balance sheets of privately held firms.

For the brokers that Moody's rates, premium rates fell during the first half of 2009, and those firms responded by cutting costs, exiting non-core businesses and slowing the pace of acquisition.

On the positive side, in Moody's view, the brokers benefit from "a valuable service offering, a high proportion of variable costs, limited capital expenditures, lack of underwriting or investment risk, and relatively stable cash flows."

The global brokers managed to keep their credit lines open in the face of the credit crunch, and exposure to credit default swaps "remained well below the averages for 'Baa'-rated firms," Moody's said.

Among the 11 brokerage firms Moody's rates, acquisitions are expected to continue to fuel growth.

Indeed, with 6,000 regional and local firms accounting for $23 billion in brokerage revenue, according to Atlanta-based M&A specialist and "Best Practices" program leader Reagan Consulting, there are ample enough acquisition targets available for them to grow non-organically.

Moody's noted that its assessment is predicated on "a gradual and painful economic recovery" that began in the third quarter of 2009.

Insurance market trends will remain favorable for commercial buyers, said Lambros Lambrou, executive vice president of Aon Risk Services and head of Aon Analytics, pointing to what the Chicago-based broker highlighted in its "Second Quarter 2009 U.S. Quarterly Market Overview." There will be exceptions based on the risk, he said, but overall, clients will enjoy favorable pricing in the near future.

For property risks, given benign third-quarter hurricane activity, if the year ends that way clients can expect the "reinsurance markets to align in a way that will benefit broker's clients in the end," he said.

There was some expectation, going into the 2009 hurricane season, that rates would edge northward, but that hasn't materialized, he added.

On the casualty side, the markets experienced flat-to-slightly decreasing rates, depending on the risk. The exception was some hardening on commercial auto, where underwriters worked to keep that line's overall premium levels intact in the face of a declining exposure base.

Buyers, he noted, have shown reluctance to move risks from one insurer to another in the casualty lines unless there was a meaningful price differential. The reason, he explained, is that policyholders need to put up capital for their excess coverage. Making that collateral commitment during this economic crisis gives many a client pause, and the expectation is that this won't change in the near future.

With directors and officers coverage, financial institutions have been hit with increases because of security litigation, but outside of this segment of the market, second-quarter results were largely flat on renewals, and the market is expected to stabilize into next year, he said.

"The reality right here and now is that we are not seeing a contraction in the amount of capacity," said Mr. Lambrou. "We are not seeing a reduction in the number of players in terms of carriers competing in the marketplace. From that perspective, looking at basic supply and demand, that would lead you to believe that while carriers would want to see a hard market happen sooner than later, the reality right now is that until we see a substantial contraction in capacity, it is hard to see their desires for a quick uptick in rates occur any time soon."

While there is no sign of a pricing upturn, carriers have not abandoned underwriting–especially on tough risks such as catastrophe for coastal properties and for earthquakes, according to Brian Elowe, managing director in Global Risk Management at Marsh. There is also solid attention being paid to workers' compensation risk to make sure insurers understand what is being underwritten.

There are two developments that could change people's thinking, he noted–either a downturn in the equity markets affecting insurers' investment returns, or a major catastrophe. Without those events, there would appear to be no reason for a change in market direction, pointed out Mr. Elowe. And even if that were to happen, he did not think the change would be long term.

The economic crisis has affected buyers' behavior, as they find themselves under budgetary constraints, he noted. Clients are not cutting their limits of protection, he said, but they are very price-conscious and are seeking to hold down costs. This has placed great demand on the need for risk analytics in an effort to optimize protection effectively and economically.

It also means clients are not necessarily willing to increase their retentions to cut costs, Mr. Elowe explained, because the added potential exposure may not be a good economic trade-off.

"We view this as a positive time for our clients to help them with their cost strategies, and we are working hard to take advantage of this [soft market] for our clients," Mr. Elowe noted.

David Daniel, chair of the Independent Insurance Agents and Brokers of America and president of Baton Rouge, La.-based Daniel & Eustis Insurance & Benefits, said many agents he has spoken with feel this has been a lengthy soft market that they believe has to change or at least stabilize for the remainder of this year and into next.

"Most believe it can't get any softer," he said, noting insurers need to make an underwriting profit at some point–at least by the second half of 2010.

"Maybe that's wishful thinking, but that's what they are talking about on the street," he added.

With commercial pricing stagnant, payrolls down and exposures reduced, clients are looking to agents to cut their insurance costs even further, according to Jon Spalding, president of the National Association of Professional Insurance Agents, as well as president and chief executive officer of Spalding Insurance Agency in East Lansing and Perry, Mich.

For example, he said he has a commercial account that 15 years ago brought in $110,000 in premium. To keep the business, that same account's premiums were reduced to $53,000.

"Insurers are not actuarially pricing our products for the exposure"–a common theme around the country, he added.

Agents are shopping around the business more because "if we don't, someone else may take the business from us." Customers who feel a loyalty to an insurer will want the agent to give the incumbent carrier one last look before switching. But loyalty depends on the customer, and many will move the business for just a few dollars, he said.

Coping with the current soft market and economic downturn, agents are finding ways to work smarter, but at the same time are working harder for less business, he said.

IIABA's Mr. Daniel said agents have to remind their clients that this is a soft market cycle that won't last, and hope when the hard market comes, it is stable and gradual. "It is hard to explain massive [price] swings when it is of no fault of their own," he said.

The economic devastation has some clients unable to get the limits they want in some cases, noted Mr. Spalding, who added that the soft market is not the only problem.

A home in East Lansing–where the failure of the auto industry has caused one in every six homes to fall into foreclosure–is now available for bargain-basement prices, said Mr. Spalding. However, when someone buys a $150,000 house for $25,000, they find insurers unwilling to cover the home's replacement worth because of the low purchase price.

Such issues, he noted, have agents working longer, making less and utilizing technology to its fullest.

Technology is an effective avenue allowing agents to get their names out there, said Mr. Spalding, while letting people know that "the help we offer is more important than what a lizard on the desk with a pair of glasses can offer," referring to the popular GEICO ad campaign.

Social media, such as Facebook, is one method of networking and building relationships, while the Web also offers a cheaper, more efficient way of doing research and exchanging information, instead of driving over 200 miles to review a client's risk, he pointed out.

"It's not all doom and gloom–just working smarter," said Mr. Spalding.

A merger or acquisition strategy can also help, he said, noting that his agency just purchased a building with another agent where they are now sharing services and cutting costs.

Mr. Daniel said an agency's survival depends on working more productively and on cross-selling, building a book of business by increasing sales in the benefits area–which he cited as a growing source of revenue at a time when commercial insurance rates and commissions are shrinking.

"Agents are very creative, and they do what they need to do to survive in tough times," said Mr. Daniel.