Change In ‘Market Psyche’ Could Fuel Near-Term Turn, Marsh CEO Says

"Insurers were at the end of their rope with depressed pricing. The mood was bad [and] at some point people just got tired," he said.

A typical scenario had underwriting leaders saying, "I'm not lowering prices anymore. Get out of my office. Just fix it."

Mr. Duperreault concluded: "You can't underestimate the impact of the market psyche. I have come to understand that a hard market may be accelerated by a catastrophe or other major event, but it must [start] in a less obvious place—the mindset of the market."

Supporting his view, he said that if ever an event should have turned the market, it was the Great Recession of 2008 and global financial meltdown.

It didn't. "The market just wasn't ready," he said.

Is the market psyche reaching a point that could bring about a hardening?

"It may not be [there] today, but we're all getting tired. So in terms of timing, I'd say it's sooner rather than later," Mr. Duperreault predicted.

At a separate event a few days later, two industry analysts were less optimistic, putting a pricing turn out to the middle of the decade absent a major event.

Robert Hartwig, president of the New York-based Insurance Information Institute said, "The markets seem positioned for a firming in 2012-2015."

"By firming, I mean a stabilization," he said, speaking at the 15th Annual Insurance Conference of the New York Society of Securities Analysts. "Right now, there is not a catalyst for an across-the-board hard market," he said, responding to the question of whether dwindling levels of prior-year loss reserves could fuel a market turn.

At best, "that is one catalyst for a firming market on the commercial lines side," Mr. Hartwig said.

The I.I.I. president said he also believes that a single line—workers' compensation—may harden "early or on its own," because results are already quite poor in the line.

"Something has got to be done rather quickly. You are seeing pricing actions being taken" in workers' comp, "but other lines—commercial auto, for one—could be relatively good still."

"You put all that together, and you don't get this traditional, robust across-the-board hard market, but kind of a firming thing over the next couple of years. You get the reality of low interest rates having to be priced into the business, [but] I don't see a significant hard market developing right now," Mr. Hartwig said.

William Wilt, a former property & casualty insurance analyst for Morgan Stanley, also suggested that the soft market could be around for awhile.

"Analysts often play the game of looking back and drawing parallels to the past, asking, 'Are we in 1997 or 1998 or even 1999, noted Mr. Wilt, who was a rating analyst for Moody's during the last soft market. "I always think of 1999, 2000 and 2001, clearly with 9/11 as the exclamation point—the real catalyst for everybody to realize what had been happening over the preceding handful of years."

Currently, some pressures on the business models of p&c insurers are clear, but as was the case in the mid-1990s, the industry has experienced a long period of favorable loss development, he said. During that prior period, marked by favorable medical inflation and other benign cost drivers, the favorable development helped to engender bad underwriting judgments and behaviors.

Referring to Mr. Hartwig's prediction of a firming in 2012-2015 absent other catalysts, Mr. Wilt offered a dimmer view based on his comparison to the last soft market. "I'd raise the possibility that we might have a longer road ahead of us than maybe we'd like to think."

CYCLE LESSONS
At the PLUS D&O Seminar, Mr. Duperreault, the former CEO of ACE Limited, imparted some of the lessons he said he taught to underwriters when he worked at insurance companies. "The best companies see soft markets as opportunities" to get better and smarter "than the other guys," and they also recognize "there can be profit in saying no" to underpriced risks, he said.

Speaking directly to the D&O insurance underwriters in attendance at the gathering, which also included brokers and lawyers, he suggested that a healthy dose of intuition needs to be used in conjunction with analytical tools to underwrite this particular line profitably.

"Hurricanes are unpredictable, but people are even more so," he said, noting that D&O insurance underwriting involves trying to "gauge human behavior."

To sort out the good guys from the bad guys—to determine which risks to write— "you have to ask yourself, 'Can I trust this broker and this client? When I evaluate risk, am I doing so by combing through paperwork, or am I looking someone in the eye,'" he said, giving the basics of profitable underwriting.

"Intuition and perception" can still play a significant role in determining what business to write, he said, urging underwriters to be realistic about limitations of modeling tools.

"There's no substitute for this kind of experience," he said.

Earlier in his address, he gave another simple wake-up call to underwriters when he explained why hard markets always eventually come. Even though insurers rely on basic probability theory and statistical loss distributions, carefully considering ranges of possible outcomes to arrive at an average price, once they do determine a price, they know only one thing for certain he said—"that price isn't right. It's either high or it's low."

"That happens all over the world, thousands of times a day," he said, noting that when insurers miss on pricing in the wrong direction—when a risk that is worse than they thought—"that's not so obvious by the time [they] make the decision on the next risk, and by the time we've all figured it out, many many years of mistakes have been made." "So when the correction comes, it can be very large," he said.