Insurer CEOs See Slow Economic Recovery, Long Soft Market

NU Online News Service, March 8, 3:56 p.m. EDT

WASHINGTON--Executives at four top insurers see improvement in areas such as housing starts, discretionary spending and gross domestic product, but they predict a slow recovery and extended soft insurance market.

Safeco President Michael Hughes, CNA Chairman and Chief Executive Officer Tom Motamed, Fireman's Fund President and CEO Michael LaRocco, and Hartford Chairman and CEO Liam McGee spoke Friday at the Independent Insurance Agents and Brokers of America annual conference here.

The CEOs agreed that a quick economic recovery was unlikely. With gross domestic product levels hovering around 2.5 percent, and consumer spending still far from robust, any recovery that happens will be slow, "with some volatility on the way," said The Hartford's Mr. McGee.

"Underemployment"--those still with jobs, but working fewer hours than they'd like--is also a problem that compounds the impact of the already high 9.7 percent unemployment figure," he said.

The smaller labor force has a big impact on insurable exposures, affecting everything from personal lines sales to smaller payrolls and fewer insurable locations on the commercial end, noted Mr. LaRocco of Fireman's Fund.

Mr. Hughes of Safeco cited an "uptick" in personal lines involving discretionary spending--such as coverage for motorcycles and boats. But, he said it was harder to see such indications of improvement on the casualty side, which is heavily dependent on employment, although he mentioned this could see turnaround in the second half of this year.

And although inflation is still not evident, and is unlikely to be an issue in 2010, the second half of 2011 could be a different story, Mr. Hughes warned.

The CEOs were reluctant to make any definitive predictions on when to expect a hardening of the insurance market, although some believe it is a long way from recovery.

Based on historic market cycles, which last around 10-to-12 years, the current soft cycle, which started around 2002, is about 7 years old, Mr. Motamed of CNA said, which means, "We still have a ways to go."

"Companies are still making profits, but growth is not there," he reported.

Although in the past the combined ratio "pain point" was about 110, he did not think it would get to that number in the current cycle before pricing turns hard due to the lack of investment income in the current zero interest rate economy, he noted.

He added he is already seeing companies starting to "push back" on prices.

Admitting that commercial lines pricing is still "crazy," Mr. LaRocco put the blame of market cycles squarely on the insurance companies, adding that "no other industry would accept the sort of pricing swings that we do."

Adding that it's the companies' responsibility to control pricing based on underwriting profit, he said that Fireman's Fund is starting to take rates up--although the exception are long-tail exposures that have different and longer cycles.

And although cycle extremes are less evident in personal lines because "companies can match rates to risk," in part due to the use of credit scoring, the current glut of capital in the marketplace means companies are still cutting prices to get business, he said.

A "rational market" in personal lines is occurring, according to Mr. Hughes, who noted that Safeco has seen auto rates increase between two- and four points over the past 12 months, while homeowners' pricing is up about five points over the last three months. For commercial lines, the bad economy makes it difficult for the industry to get appropriate pricing, he added.

However, conditions seem to be getting better, with commercial pricing up between four- and five points, and more stabilization on the investment income side for the industry as a whole, Mr. Hughes added.

"Capital has been replenished from the investment income side, with capital almost back to 2008 levels," he said. "We're a highly capitalized industry, and in pretty good shape. Because the property and casualty industry is highly regulated and state-specific, 85 percent or more of our investments have always been in fixed dollars or in bonds," he said.

(For more from this panel on regulatory reform, the health reform debate and recruiting the next generation of insurance workers, see NU's March 15 edition, in print or online at www.property-casualty.com.)

Laura M. Toops is Editor of American Agent & Broker, part of Summit Business Media's P&C Magazine Group, which includes National Underwriter.