Current market conditions may be the "new normal"–lasting for several years– industry leaders predicted recently, with one attributing the continued softness to the absence of American International Group's historical price leadership.
In the past, "when AIG decided to change the pricing, the market was able to follow along," said John Molbeck, president and chief executive officer of Houston-based HCC Insurance Holdings. "This will be the first market cycle where we don't have that event," he said.
Mr. Molbeck made the observation during the Standard & Poor's Insurance Conference earlier this month, where more than a dozen insurance and reinsurance company executives and analysts predicted that a market turn is at least a year away.
For the most part, executives echoed Jay Gelb, managing director of Barclays Capital in New York, who blamed the delay on excessive capital in the property and casualty insurance sector.
"The p&c insurers are overcapitalized. It's as simple as that," he said, speaking on a panel of Wall Street analysts, and later putting a number on the magnitude of excess capital–$100 billion.
Participating on a separate panel of primary insurance carriers, Mr. Molbeck said, "I think we have to accept the fact that we may be at a new normal."
To be sure, he said the market isn't showing the disturbing signs of softness that were evident from 1997 through 2001, when insurers would agree to write three-year non-cancellable policies, for example.
"We're a lot smarter as an industry, [but] this is the first market in 30 years that AIG hasn't been out in front leading," he said.
Mr. Molbeck made similar remarks at the 2nd Annual Oppenheimer Insurance CEO Summit a day before the S&P conference.
During the Oppenheimer Summit, which was simultaneously webcast, he said that during past cycles dating back to 1980, AIG "could effectively turn the market by saying pricing is going to go up or pricing is going to go down. And there is nobody [now] that is taking the leadership position, rightly or wrongly, to actually drive that pricing forward."
"This is a new experience for the p&c market," he said.
"The old AIG, before they had their problems, [was] putting out $200 million or $400 million limits on property and liability," he continued. If AIG "decided pricing was going to go up 20 percent, and they wrote most of the primaries and the first excesses, I think they had a very significant impact….And it made it easier for the brokers and the rest of the market to follow," Mr. Molbeck said.
At S&P, John Doyle, president and CEO of Chartis U.S., the U.S. p&c operations formerly part of AIG, addressed the commentary in response to a question from the audience.
"I have come to learn over the last 18 months that we're responsible for all that ills the insurance industry," Mr. Doyle said.
"If I accept responsibility for anything, it's for not going away," he said, noting that over the past year or so, "some new investment came into the business probably betting on our failure"–adding to the excess capacity.
Mr. Doyle said he disagrees with research reports that say Chartis' ability to lead a pricing change is not what AIG's once was. Those reports are based on "a market-share driven theory, which I don't think is really all that supportable."
He pointed to Chartis' global presence and its claim infrastructure as characteristics that continue to draw brokers and customers, making them less sensitive to price.
"Our global infrastructure means a hell of a lot more to the customer in a global economy where exposures are growing outside of the United States more rapidly then here," Mr. Doyle said.
He also said that Chartis pricing trends are performing better than the major indices, such as MarketScout, adding that the company continues to lead many programs and push prices.
"Having said that, there are a number of new markets out there right now trying to build their businesses in anticipation of a market turn"–they're "betting on the cycle turning in a relatively short period of time," he said.
That will take some time to manifest itself, he predicted.
SOFT MARKET DOLDRUMS
Giving an analyst's perspective on the market, Mr. Gelb said the commercial lines and reinsurance markets will be soft "for at least several years barring major catastrophe losses," or some other type of shock to industry capital.
He said his firm believes the industry is 20 percent overcapitalized, basing the assessment on current operating leverage metrics–measures of operating results to surplus–compared to normal levels.
That translates to $100 billion, he said, noting that insured losses from the 2004 and 2005 hurricanes were less than that–coming in between $60 and $80 billion.
"I anticipate that earnings will decline through 2011 largely because of the soft market in commercial lines and reinsurance," he concluded.
Carrier executives, like Thomas Motamed, chairman and chief executive officer of Chicago-based CNA, also gauged the impact of catastrophes on a market turn.
He said brokers often tell him "what we need is a good catastrophe. They believe that will drive the market turn, [but] I don't believe that for a second," he said.
"The big companies with strong balance sheets can afford to take some hits," he explained, adding that the best companies are well capitalized–much larger than they were a decade ago, when a single catastrophe may have changed the market.
"How about two catastrophes?" he asked rhetorically.
"These are companies that make $1 billion or $2 billion a year…What you would need is multiple events," he said, postulating a natural catastrophe, an accompanying financial crisis and perhaps a terrorist event.
At a separate session, David Cash, CEO of Bermuda-based Endurance Specialty Holdings, answered a slightly different question–whether the market can turn without some crisis.
"A painless market turn is something I dream about, but I don't think I'll experience it," Mr. Cash said.
"It's the nature of the beast" in insurance, he said, citing an often-depicted view of the cycle in which the hardening phase begins with "fear and panic" and then settles back to a level of complacency once the storm is weathered. In "most financial products, where the cost to manufacture is not that great, there's a tendency to see that cycle," he said, noting that there's a similar course in debt markets and markets for other financial products.
Mr. Motamed said "the industry can withstand a lot of hits," suggesting that a more important factor relevant to insurance pricing changes is what happens with the economy. "Until the economy gets better, people are not going to pay us more for the product," he said.
"I think everybody agrees we're in the doldrums of a soft market," he said, noting that most soft cycles run 10-12 years. Putting the beginning of this soft market at 2003, he said that "we're probably about eight years into it."
"I haven't seen any dramatic change in the market that suggests things are going to get better from a rate perspective," he said, noting that the best companies–"the bellwethers of what happens in the market"–are still turning combined ratios in the low 90s and returns on equity between 12 percent and 15 percent.
"Those are the best companies," he said. "If you're No. 94 on a list of 100, and you declare a hard market [because] you're going to raise rates, nobody's listening."
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