NU Online News Service, April 24, 11:48 a.m. EDT
Declaring that a turn to a hard market cycle is more visible, the chief executive of W.R. Berkley Corp. says a company somewhere is in for major trouble because they are "stupid" not to increase rates.
"Hard markets always start this way and then something happens," which leads to "dire financial difficulties," says William R. Berkley, the CEO of the Greenwich, Conn.-based insurer during a conference call to discuss first quarter earnings today.
The "something" happens when companies have to begin to pay for their underpriced past. It occurs every time the market begins an upward cycle, Berkley says.
"It happened to AIG [American International Group Inc.] but AIG got bailed out by the government," Berkley says. "Look at all the billions of dollars of deficiencies they had to make up for."
No one knows "where and what is sitting out there," but "usually someone doesn't have the ability to make it through" the cycle turn, Berkley continues. "I don't know who that's going to be and I can't tell you for sure."
First quarter net income is up about 17 percent from the same period last year at W.R. Berkley Corp. as average rates on renewed policies increased 6.5 percent. The commercial insurer reports net income of $135 million during the first three months of 2012 compared to about $116 million during the same period in 2011.
Rates for new business are 4.2 percent higher than renewals, adds Berkley.
For the first time in several years, W.R. Berkley saw rate increases in back-to-back quarters, the company says. Increases at renewal in the fourth quarter of 2011 averaged about 4 percent.
W. Robert Berkley, president and chief operating officer, says there is a gradual increase in the flow of submissions to the specialty market but some carriers "don't seem to fully appreciate that things are changing." There remains a set of irresponsible companies but they serve as a "hindrance, not a barrier," he says, adding, "There is somewhat of a lopsided barbell in the marketplace between those that are seeking rate adequacy and those that don't get it." Despite the actions of a few, the general trend is clearly improving rates, as more carriers are announcing rate increases..
Net premiums written at W.R. Berkley increased 11 percent to $1.2 billion compared to the 2011 first quarter. W. Robert Berkley says more than half of the increase in net premiums written is attributable to improving rates, mostly in international and specialty segments.
Nevertheless, the elder Berkley says it doesn't take long to realize that what some companies are doing is "stupid." And, "Stupidity is not limited to any one company,or any one underwriter; it pops up in all markets," he adds.
Added submissions in the specialty segment have as much to do with terms and conditions as they do with rates, Berkley explains. To start a soft market, standard market carriers cut rates, and then underwriting standards are loosened. Then rates are cut further as standard carriers compete.
When the standard market realizes rate increases are needed to sustain the business, they can't raise rates enough. Then underwriting standards tighten, which drives risk back to the specialty market.
But again, the environment varies in specific lines. In excess workers compensation, for example, one company remains aggressive, pricing business 20-to-40 percent less than W.R. Berkley.
"That's one place where we lost substantial business," Berkley says. Parts of the professional liability market also remains resistant to price increases.
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