NU Online News Service, Aug. 1, 11:43 a.m. EDT
NEW YORK—A well-run insurance company does not need a hard market to make a profit, and companies that are anxious to see one are desperate for the income, the chief executive of Marsh & McLennan Cos. says.
In an address here at the Lloyd's of London client event last week, Brian Duperreault, president and CEO of Marsh & McLennan, discussed whether a hard market will be coming soon and what the motivation for it is.
"Some of you may know that Lloyd's was created in a London coffeehouse in 1688," says Duperreault. "I think it was in 1689 that industry observers first started asking, 'So…when do you think we'll see an end to this soft market?'"
Throughout his career, he has heard this question on many occasions, but today the question is being raised about whether there will be a hard market at all and if the soft market is the new normal.
Technology, analytics and modeling assist in underwriting today, giving companies a sense that they are adequately pricing risk. However, Duperreault notes, "even with the incredibly sophisticated modeling we use today, there's always going to be a lag."
By the time the true nature of a risk is figured out, underwriters may need to make up for years of mistakes, he says. "So when the correction comes—and it always does—it could be significant," he explains.
Recent history has shown many instances where events could have triggered a hard market, but it never happened, he says.
Today, he asks, "Is the market's mindset reaching a point where it could serve as a springboard for hardening market conditions?"
He answers that it is a question "that can't be answered in real time. You only really know in hindsight."
With the losses the markets have experienced so far this year, and predictions of an above-average hurricane season, Duperreault says there is "a decent chance" of a turn occurring.
However, he says that "if you're running your business the right way—if you're writing smart risks—you're not waiting for the market to harden."
"The risk isn't in pricing," he observes, giving as an example the time he spent as the chief executive of ACE. "It's never the price. I would tell my underwriters, 'I want you to get the best price you can get, but I don't want bad risk at any price.'"
"I've found that those who are always looking for the hard market do so because they've painted themselves into a corner—it's their only real opportunity to make money. The savviest institutions are the ones who—through solid instincts and hard work, prudent decision-making and smart planning, and sound policies and structure—make their money in soft markets. And when the market does eventually turn, they're sitting even prettier—it's almost a bonus."
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