P&C Surplus Slowing Market Turn

NU Online News Service, June 8, 2:45 p.m. EDT

Despite all the catastrophes of 2011, the year as a whole was income statement-driven—an earnings event—rather than a capital and surplus event.

Industry observers have declared as much, and a report on first-quarter results from 50 large U.S. property and casualty insurers followed by ALIRT Insurance Research, collectively called the ALIRT P&C Composite, would appear to back up the statements—and point to yet another reason many are tempering outlooks that a hard market is upon us.

“This is a new animal,” ALIRT principal Daniel Paul says of this particular dynamic. “This is why I think you can tell we take a somewhat skeptical view” of a market moving quickly toward hardening rates.

According to the ALIRT P&C Composite, surplus increased 6.1 percent during the first three months of 2012, and total industry surplus is now 5 percent higher than it was at the end of 2007, before the financial crisis.

This financial capacity “argues somewhat against a continued rise in rates, especially given the relative decent underwriting results by the broad industry,” the report says.

Then it would appear—at least after the first three months of 2012—that the 1.6 percent drop in industry surplus from 2010 to 2011 could be the “transient occurrence” pondered by Robert Hartwig, president of the Insurance Information Institute.

Paul lists slow economic improvement and an unwillingness of buyers to pay higher rates among reasons for, at best, a more-shallow market hardening rather than what some in the industry have called an upward hockey stick.

But according to recent conversations Paul says he's had with brokers, “things may be getting a little bit better.”

He says, “Buying behavior seems to be getting better. It may be companies can now afford rate increases without endangering the company.”

The psychology is changing, Paul theorizes, which is as much a driver of a hard-market turn as any insurance company's earnings numbers. In other words, when buyers and insurers get used to higher prices, there can be a “self-fulfilling tendency” toward a hard-market shift.

Yet Paul has heard others wonder whether the P&C market has become so specialized that it is able to keep prices down and still make money.

“You hear a lot about data mining and the increased capabilities of underwriters to really dig down and more accurately write exposures,” Paul says. “Better pricing should become a factor in keeping market cycles shallow.”

ALIRT's report also lists underwriting profitability and continued prior-year reserve releases as other reasons for the slow-moving market turn. The composite group turned a combined ratio of 97.8 for the first quarter—the best result since 2008's first quarter, ALIRT says.