Advisen: Rumblings Of Turnaround In Insurance Market

The soft market is expected to continue unabated into 2011, but there are signs that insurers are beginning to hedge risks and become more circumspect about those that they accept, according to a group of experts.

The observations came during a webinar hosted by consulting firm Advisen and sponsored by Zurich, titled "The Insurance Market in 2011: The Lingering Effects of the Recession Fuel Competition."

In the release of its market report, Advisen said commercial lines property and casualty insurance companies have seen their pricing gains of the 2001-2003 hard market disappear, and there are few signs of a turnaround in 2011. The Great Recession of 2008 has depressed the demand for p&c insurance and capacity remains abundant. The result, said Advisen, is that the grip of the soft market will not loosen soon.

In a statement, Dave Bradford, Advisen executive vice president and the report's author, said while insurers are saying prices have hit rock bottom and must rebound soon, the reality is that current economic conditions are not conducive to a price increase soon.

Surplus lines have been hit especially hard by the premium fall, with written premium dropping 11 percent this year, said Mr. Bradford. This is not surprising, he noted, since in a soft market premiums flow from the nonadmitted to admitted market. He said the premium dollars will eventually make their way back into that market, "but times will be lean for surplus lines insurers and brokers until then."

Barring a catastrophic event that wipes out excess capacity, Advisen said the beginning of a turnaround is not expected until some time in 2012, but even at that point, rates will likely "rise slowly and erratically."

In its report, Advisen noted that the recession has hit insurers' surplus hard. Investment losses during the Great Recession wiped out $85 billion, or more than 16 percent, of surplus.

In 2009, insurers made up some ground with a gain in surplus of $54 billion by the end of the year and there was a further increase of $19 billion in the first half of 2010.

The Great Recession also witnessed an increase in fraudulent claims, said Advisen. The National Insurance Crime Bureau said questionable claims rose 14 percent in 2009 and increased by the same percent in 2010 in four of six categories.

The principal commercial catastrophe loss for the year was the Deepwater Horizon oil spill that was put at between $4 billion and $6 billion in insured loss, with total economic losses estimated at $35 billion. The event had some impact on the global energy sector, but none on the broader property marketplace.

With no major hurricanes striking the United States and wiping out excess capacity, "brisk competition is likely to continue, and perhaps accelerate in some areas," Advisen said.

Reviewing four lines of business--general liability, directors and officers, property, and workers' compensation--no dramatic rate increases are expected in 2011. The exception may be workers' comp where rate increases or decreases will vary by state, but on average there will be pressure for rate increases.

During the webinar, Mike Foley, chief executive officer of Zurich North America, said the current soft market is a "challenging environment" where strong insurers should become stronger, "but it will remain a challenging marketplace."

As surplus is released and the specter of inflation hangs over them, insurers should be doing more to prepare for the turnaround in the marketplace, said Mr. Foley, especially when it comes to pricing lines of business in anticipation of future inflation.

Robert Howe, managing director of Marsh Inc., said while the average may indicate the market is soft, the price a client pays ultimately comes down to the individual risk and how that is managed. Those that are managed well, he indicated, receive the benefit of advantageous pricing.

"Averages are a guide, but should always be taken as that," he said.