SPECIALTY LINES MARKETS

Soft market redux

Surplus lines leaders predict an end to the softness, but disagree as to when

By Phil Zinkewicz

As we come to the end of 2008, the U.S. specialty lines insurance marketplace is still operating under soft market conditions. There’s no question about that. The real question is when will the market turn? Some industry observers believe the market will remain soft throughout 2009 and even into 2010. Others, a bit more optimistic, say that a turnaround can be expected in the latter part of next year. Then there is yet another school of thought, wishful thinkers perhaps, who put the beginnings of a turnaround in the second quarter of 2009.

Why all the uncertainty? Well, first because market cycles are becoming less predictable than they were 30, 20, even 10 years ago. In the last decade, new capital has come into the business of insurance, disturbing the usual insurance cycles. Second, this has been a soft cycle which has not necessarily been protected by high investment yields as in the past.

But, most important, at the time of this writing the economic climate in the United States is a stormy one. How will the specialty lines insurance marketplace be affected by proposed bailouts of huge investment vehicles and a monolith insurance company to the tune of $700 billion? In the investment community, is the pendulum about to swing from deregulation to ponderous regulation and what will that mean to new capital coming into the specialty lines insurance business? How will the new administration look upon this sector of the insurance business?

John Wood of Special Risk Associates in Shreveport, Louisiana, president of NAPSLO, says that it’s too soon to tell what impact any of these developments will have on the specialty lines business. “The market is still soft in the South,” he says. “We’re hoping things turn around, but there hasn’t been any sign of hardening prices as yet. We’re still seeing competition from the standard carriers. We may see some buyers moving away from AIG because of its troubles and taking their business to other carriers, but I don’t think that will have much of an impact on specialty lines.”

Wood says that, despite the current economic picture overall, specialty lines carriers will just have to stay on course. “Every day is a challenge in the specialty lines arena. There are the ebbs and flows that are to be expected. What we need to do is focus on our niche markets, stick to our underwriting disciplines, keep our expense ratios in check and provide the customer with the products they need. The surplus lines arena has a good record of being profitable and we’re doing what needs to be done to remain profitable.”

Curtis Anderson, president of National Binding/Program Business for Risk Placement Services and incoming president of the American Association of Managing General Agents (AAMGA), says that, while the specialty lines marketplace is still a large and capable one, beneficial to the overall economy and a “good place for a person to make a career,” there are elements that are making this soft market different from others.

“Pricing has dropped in this soft market much faster than in others,” he says. “I believe the loss ratio for the industry has moved higher very quickly. When you take that into consideration with economic conditions, such as the loss of jobs and the price of gas, you are seeing some difficult times for the industry. After all, those in the specialty lines market have to make money to survive. Perhaps that will mean a turnaround faster than originally expected.”

Robert Schacher, of Continental Special Risks, Inc., and senior vice president of the Eastern region for the AAMGA, says that the U.S. storms by themselves would not have an effect on the soft market, but, when taken into consideration with the other troubles, specifically AIG’s predicament, there could be an early turnaround. “It’s been reported that the industry combined ratio was 99.9 for the first half of 2008. When it rises over 100, then we’re in a losing situation and, as far as I can see, nobody is making that up in the stock market.”

At present, there is a good deal of capacity in the specialty lines marketplace, according to Schacher, but that could change. “We have to look at the global picture. There have been some major catastrophic occurrences in Australia, and that could result in some worldwide capacity disappearing. I’m hoping for a turnaround next year,” he says.

“Extremely soft” is the way Tom Albrecht of Southern Insurance Underwriters and past president of the AAMGA describes current market conditions in the specialty lines arena. However, he says this year’s hurricanes could cause the market to turn next year, possibly in the third or fourth quarter. “It could be sooner,” he adds. “The E&S market continues to be profitable because we tend to get the premium we want for a particular risk. We have to remain firm in our underwriting judgment even in the face of excessive competition.”

Mark Rothert of Ron Rothert Insurance Services, Inc., and senior vice president of the AAMGA Western region, takes a cautious approach when discussing market conditions in specialty lines. “I look at the AIG situation, this year’s storms and the increase in the industry’s combined ratio and I like to think they will have an impact on the soft market. I would like to think the market will turn next year, but when I say that I have my fingers crossed. People in the arena really haven’t had their noses bloodied yet.”

Most important, according to Rothert, is getting the economy going again. “People who are out of work or whose businesses have failed don’t buy insurance,” he says.

Finally, Euclid Black of Black & White Associates and current president of the AAMGA, bemoans the erosion of underwriting standards on the part of the standard insurance carriers. “The soft market is the result of the standard companies broadening their appetites substantially,” he says. “And, they have broadened the classes of business they write.”

Black says, because of the economy where people are out of work, the standard market is desperate to increase their writings. “It’s difficult to tell whether they’re making money or not. The E&S market represents about 15% of the total property and casualty insurance marketplace. If the standard companies take the best 5% of the E&S market, those accounts will make up about one seventeenth of their total book. It is difficult for them to tell whether they’ve made a mistake.”

Black says the situation regarding AIG will not have a major impact on the specialty market. “There is enough capacity out there so that AIG’s effect on the market will be negligible. Unless or until Wall Street cannot fund additional capital in the marketplace, the soft market will go on, possibly for two or three more years,” he says.