Soft Market Becoming The Norm Thanks To Recession, Excess Capital

Colorado Springs

The soft commercial insurance market is becoming more of the norm than the exception, as broker and carrier officials gathered here suggest the pricing cycles of the past may be changing to an almost permanently depressed state.

In a series of interviews here at the 97th annual Insurance Leadership Forum of the Council of Insurance Agents and Brokers, brokerage and insurer executives said the current soft market could continue for at least another year or two.

“We've met with two dozen insurance companies, and they said next year expect more of the same,” commented Warren Mula, Aon Risk Solutions U.S. chair and chief executive officer at Aon Broking.

“Underwriting discipline has not gone out the window–it still remains,” he said, noting that the intensity of competition is focused on “benign risks” and markets where insurance is limited and carriers believe there is opportunity.

“They are all looking to getting business they are not in today,” said Eric Anderson, CEO of U.S. Retail for Aon Risk Solutions.

“The competition is not showing any sign of slowing down,” observed David L. Eslick, president and chief executive officer of Marsh & McLennan Agencies.

“It will definitely remain soft through next year,” added H. Wade Reece, chair and CEO of BB&T Insurance Services Inc., who added that the trend points to some stabilization–a bottoming out in pricing that the market is seeing now. (See the latest “Market Barometer” report in the News section.)

The consensus among brokers interviewed here is that only an extraordinary event could have enough impact to turn the market around. Depending upon who was asked, the loss estimate for such an event ran from a low of $60 billion to as high as $120 billion before a market-turning impact would be felt.

“Without a big loss, I can't see it changing,” said Alastair Swift, chief placement officer for Willis North America.

“People do not understand what number is truly needed to dislodge the market,” added Carl Beardmore, group CEO for BMS Group, based in London.

One reason for the lingering soft market is the availability of capital, fueling competition and keeping markets depressed.

Mr. Swift said a lot of capacity came into the market with the expectation that some insurers such as American International Group and XL “would go by the wayside” and open up some opportunities. When that failed to happen, insurers were forced to find other places to deploy their capital. The result is the current soft market condition.

Much of that capital deployment is going into niche business, brokers noted.

“Everyone is specializing more and more–we are seeing more of that, and we are building around that,” said Mr. Mula. “Clients want specialization, and that produces better underwriting results. We believe that is a win-win all the way around.”

There is some question, however, about how long insurers can continue to keep pricing down. “Overall, the insurers are in their cheating phase,” remarked Mr. Swift. “If you look at a lot of underwriters' results, they are not that great, but they are not being helped by the economy.”

He noted some changes in market conditions are taking place in isolated areas–such as California workers' comp, for instance–but that just seems to be fueling competition once it happens.

Mr. Reece said the recession has played a role in keeping a harder market at bay. The dramatic changes in the U.S. economic system–from a manufacturing- and agriculture-based economy to a service economy–may translate into fewer losses for insurers. That, in turn, could mean less impact on underwriters.

“The future may be more [individual] industry-based market changes,” he suggested.

Robert Childs, chief underwriting officer and chair at Hiscox U.S.A.–an insurance and reinsurance company based in Bermuda–theorized that some insurers are counting on investment income to continue to drive their earnings while ignoring their combined ratio results. It is a bet that his company is not willing to make, he noted.

“It is like driving the car with half of the dashboard blacked out,” he remarked.

Brokers, however, are preparing to deal with the current soft market situation for a long time to come.

“You can't build your business around a hard market. You have to build it around the market you have,” said Mr. Swift.

Meanwhile, while the CIAB is proud of the work it did for producers leading up to the health care reform law, the association's chair said much remains to be done to safeguard members' interests.

CIAB Chair H. Wade Reece–the chair and CEO of BB&T Insurance Services Inc.–said that despite some onerous measures in the health care law, the CIAB, lobbying on behalf of the insurance brokerage community, was able to remove measures that could have potentially harmed brokers' relationships with clients.

“The Council's goal was to safeguard the broker position and the employer-provided group health insurance marketplace,” he said. “There were a number of efforts that would have diminished the role we have with our clients, and our legislative team was able to defeat them.”

He noted that despite passage of the law, implementation is the next battleground for insurance brokers, as it will take years to implement. The upcoming election could well decide the eventual fate of the law, and brokers need to support CIAB's efforts to make brokers' interests known through support of its political action committee, he added.

“Legislative actions have a direct impact on regulatory outcomes,” he observed.

Turning to the recently approved financial reform law, Mr. Reece praised the “decades of shoe leather lobbying” that it took to finally get surplus lines reforms enacted. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the payment of surplus lines taxes is streamlined in an effort to improve efficiency and reduce costs, something Mr. Reece said he is certain other brokers applaud.

The association, he said, is also looking to improve broker efficiency with the LexisNexis Insurance Exchange (www.lexisnexis.com/risk/insuranceexchange/) that “promises to deliver new workflow efficiencies while allowing us to pursue new business opportunities.”