NU Online News Service, June 7, 2:20 p.m. EDT
NEW YORK—While one insurance executive says the current market cycle has been "very unique and different" because its bottom coincides with an economic downturn, another executive says the same human factors of "fear and greed" are driving insurers' behavior.
Speaking at the Standard & Poor's 2011 Insurance Conference Frederick H. Eppinger, president and CEO of The Hanover Insurance Group, mentioned the cycle's timing with respect to the economic downturn, and also said insurers have more insight into profitability today than they did during previous cycles. "Whether they use [the new information] or not is another story," he says, but he adds that people are smarter about profit today.
But W. Robert Berkley, Jr., president and chief operating officer of W.R. Berkley Corp., says that while this cycle may be different with regards to better data and information, the two human characteristics of fear and greed remain. "We've developed all these great tools, and they are helpful," he says, but he notes that human beings have an ability to use tools to rationalize decisions they want to make.
As an example, he notes that with all the underwriting tools at insurers' disposal, the National Council on Compensation Insurance (NCCI) reports that the U.S. workers' compensation market is running at a 115 combined ratio. Berkley questions whether insurers are truly using the tools rationally.
Michael L. Browne, president and CEO of Harleysville Group Inc., says that even with all of the new tools, "the bottom line is there's no substitute for truly understanding your business" and making sure everyone in the organization is on the same page.
Berkley says he expects to see adverse reserve development in the future. "I don't think it's going to be as ugly as it was in the late 1990s," he says, "but I think it is very unlikely that this won't be a story that ends with tears."
Browne adds that with so many years of soft pricing, the favorable reserves seen in recent years will be difficult to reproduce. He says the industry position is still reasonable, albeit weaker than it was, but he adds that reserves will likely begin to dry up for a lot of companies. He says it could be seen initially in workers' compensation and other longer-tail lines. "If people are going to fudge anywhere, it's there," Browne says.
Speaking to the current state of pricing in the industry, Eppinger notes that personal and commercial lines are "separated much more in this cycle" than in previous ones. He says personal lines are seeing rate increases, while commercial lines remain difficult.
"But as in every cycle," he notes, "there are pockets" where pricing is more favorable from a carrier's perspective.
Browne says he is seeing better prices in the small-commercial market. He notes, though, that carriers must make investments in a good technology platform in order to succeed in writing those lines.
Browne says he believes there is a good chance that the pieces are in place for a market turn. "You have a series of years of increasingly inadequate pricing, accident-year combined ratios are going up," and there have been substantial catastrophe losses both in the domestic and international markets, he says.
Berkley says he believes the market has already begun to turn. He says there is a misunderstanding among some that the market simply turns overnight. The reality, he says, is that in casualty lines, there is generally a level of unrest that builds, and then urgency increases over time.
In the previous soft-market cycle, Berkley says, the 9/11 attacks didn't turn the market. He says the market had already been turning, and that event accelerated the turn in a dramatic way. Severe catastrophe activity later this year could have the same effect, he says.
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