Critical Issue Report

Major changes—slow to come

Predictions indicate that soft market will continue to reign

ByPhil Zinkewicz

Insurance industry hopefuls who are wishing for an end to the current soft market might have to look past 2010 to have their wish come true. In its latest Property-Casualty Industry Forecast, Conning Research and Consulting sees only a moderate hardening through 2010, with the most market improvement beginning in 2011.

Says Clint Harris, analyst at Conning Research and Consulting: “The combination of recessionary conditions suppressing premium exposure growth and continued price decreases in most commercial lines of business keeps our industry forecast at negative premium growth for 2009. Recessionary conditions also can suppress losses, including reduced frequency from fewer exposure units and reduced loss severity due to deflation in some property loss cost drivers.

“Recessionary conditions and the potential for loss reserve releases have guided us to a more favorable loss and combined ratio projection for 2009,” Harris continues. “The continuation of price decreases in most commercial lines of business, and the recession repressing exposure growth, continues a string of negative premium growth for 2009 that began in 2007.

“With expected average investment returns and capital gains opportunities still somewhat limited, insurers are likely to focus on underwriting returns. Looking forward, we anticipate continued price firming in personal lines and a turn in pricing for most commercial lines in 2010. Our assumption of the economic condition is a gradual recovery in 2010, resulting in a 1.8% real GDP growth and modest inflation. The forecast for 2011 assumes a more robust economy at 3.0% GDP growth to drive premium and loss exposure growth. Continued price firming also is expected to accelerate premium growth and mitigate growing inflationary conditions on loss severity,” he says.

Harris points out that the property and casualty insurance market remains relatively competitive. “Government inflation PPI (producer price index) data indicate average decreases of 0.4% and 0.8% for commercial automobile and workers compensation, respectively, through May 2009. CMP is showing some increase, which is consistent with insurance broker reports of property increases for catastrophe exposures.

“The environment likely requires a substantial number of insurers to commit to premium rate increases in order to secure them for the industry,” Harris remarks. “Momentum and recent filed rate increases from leading insurers indicate personal lines are further along in price firming than are commercial lines. Commercial lines price firming likely will develop more slowly and begin in just a few lines of business.

“Deteriorating underwriting results are expected to be the key motivating factors for insurers to firm their prices. Preliminary first-quarter statutory results indicate a 2% increase in direct losses compared to the first quarter of 2008, despite about $500 million less in total catastrophe losses than the same time in 2008. Personal auto liability, homeowners and workers compensa­tion lines continue to indicate deterioration in their loss ratios, although commercial auto liability and CMP show some improvement.”

Insurance access to capital markets has returned somewhat, according to Harris. This was a concern, he says, at the beginning of 2009 as capital appeared to flow less than in previous years. “For example,” notes Harris, “new catastrophe bond issues stopped in September 2008 through January 2009. Catastrophe bond issues returned starting in February 2009 and now have more than $1.4 billion total issued in notional value in nine bonds through June.”

Finally, Harris predicts a slow recovery in 2010 and a return to more robust economic growth in 2011, implying an increase in both premium and loss exposures. There may also be a substantial acceleration in inflationary factors that drive loss severity, he says.

“Medical cost inflation has continued into the recession and could increase more rapidly during the recovery. A major revision in national health care has implications for substantive change, but how this develops is currently beyond reasonable forecasting. Other cost drivers, such as construction costs, are likely to reverse their deflationary trend in 2009,” says Harris.

Another perspective

Echoing the Conning Forecast, a recent property and casualty survey by The Council of Insurance Agents & Brokers (CIAB) shows that a hardening market is nowhere in sight. Rates for commercial property and casualty premiums idled during the second quarter of the year, according to The Council.

“We saw no significant change in pricing trends from the first quarter to the second quarter,” said CIAB President Ken A. Crerar. “If a hard market is coming, it’s up the road a bit. The pricing seems to be more a result of the weak economy than capacity.”

One broker surveyed by The Council noted: “Most carriers have realized that the market is not hardening as expected. We are reverting back to 2008 underwriting practices.” Another said: “No change. Competition remains fierce. Still, some carriers are trying to raise prices on renewals while aggressively competing for new business.”

Other brokers echoed those views: “Carriers are more aggressive on new business since it appears all carriers’ new business numbers are down.”…“New business pricing is much different than renewal. Insurers are attempting to gain rate increases on renewals and more aggressively pursue new business.”

The only problem areas, according to some brokers, continue to be CAT zones, particularly quake coverage in California and coastal winds. Directors and officers (D&O) for financial institutions is also a troubled line, according to one broker, as is workers compensation.

When asked if they saw any improvement in the market or the economy affecting their business in a positive way, an overwhelming 84% of brokers said “no.” The economy remained at the top of the list of the most critical political issues facing the United States today, followed closely by health insurance reform.

The author
Phil Zinkewicz is an insurance journalist with more than 40 years’ experience covering the international insurance and reinsurance arenas. In addition, he regularly writes for a number of London publications.