NU Online News Service, April 15, 2:48 p.m. EDT
An insurance industry analyst using a proprietary scoring method designed to reveal early warning signs of trouble for property and casualty insurers sees a market turn on the horizon—but says it isn't here yet.
David Paul, a principal for ALIRT Insurance Research, LLC in Windsor, Conn., gave NU Online News Service a glimpse of the scoring method that his firm uses to analyze the financial strength of roughly 1,600 P&C insurers.
"[The hard market] is definitely coming, but maybe not as fast as some people would think if they did not have this type of look," he says, referring to a line graph of the composite ALIRT scores of the top 100 commercial lines insurers over the past 15 years.
ALIRT scores—derived every quarter from an analysis of operating and investment ratios as well as other financial strength measures—range from 0-100, with higher scores assigned to stronger insurers. The 10-year median industry score is right in the middle, at 50.
Although carrier scores have been trending downward since 2007, the composite has been above 50 since the middle of 2005, according to the graph.
In contrast, back in 2001, the composite was closer to 35 as the market turned from soft to hard.
Paul intends to include this graph in a presentation he will deliver to members of the Target Markets Program Administrators Association at their midyear meeting in Boston next month.
Giving NU Online News Service a preview, Paul begins his market-turn analysis with a historical review of industry-surplus levels, which trended downward from 1999 to 2002 to a low point of just under $300 billion. Surplus levels have been rising since 2006, but Paul notes that "just because there's a lot of surplus doesn't necessarily mean that people are going to continue writing business."
Capital is not the same as capacity, he says. Capacity reflects the financial capability to write, but also the willingness to do so. "We could end up with a lot of surplus, but with underwriters and managers just saying enough is enough"—and that could cause the market to harden, he suggests.
"That's what we hope for. But history has shown there has to be some type of pain" for this to happen, suggesting that ALIRT score levels can be a pain gauge.
Historical composite scores for commercial lines writers started trending downward in late 2000—an early indicator of pain driving the last market turn, he says, noting that the composite score fell from 50 in 1998 to around 45 in 2000 and plummeted to about 37 in 2001.
Scores have been trending slightly downward over the past two years, "but nothing right now is indicating that we're at the point where pricing would necessarily turn," he concludes, noting that the current level is nearly 10 points above the prior tipping point of the year 2000.
At TMPAA, Paul will share some information about score levels of TMPAA carrier member companies, in addition to his market-turn assessment.
For more information on the program carrier scores, see related article, "No Red Alerts In Program Business Segment," which will be posted on the E&S/Specialty channel today.
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