Soft Market Talk Remains Premature

J. Robert Hunter, insurance director for the Consumer Federation of America, has a bone to pick with us. He recently e-mailed the following letter:

“You probably remember your Hard Market Aint Dead Yet editorial of May 5, chastising me for saying that the end of the hard market was likely within the next few months. Now it seems that I was not so far off the mark, at least according to the chairman, president and CEO of the Insurance Services Office, Frank Coyne, who laments (in a cartel-like pitch to its insurers) that if the next soft market is not already upon us, the hard market is certainly coming to a close.

“What happened to the NU prediction that CFA was wrong and that the commercial market is going to remain, if not hard, then very firm for the next couple of years?”

Sorry, Mr. Hunter, but we stick by our prediction.

For one thing, there is a big difference between a soft market and a moderating but firm one. Were nowhere near the kind of market in which insurers are madly cutting premiums, often below anticipated loss costs, while expanding terms and conditions for no additional charge.

Mr. Coyne did indeed say that the hard market is coming to a close, but the implication of that statement is relative. Rates will no longer soar between 30 percent and 100 percent routinely in some lines, and selected clients might even see a rate cut here and there, but no race to the bottom is underway. Indeed, our own “State of the Market” survey showed that commercial buyers and brokers alike still expect significant premium increases and, at best, stable terms and conditions throughout the current renewal cycle.

With industry net income up substantially, there is a temptation for insurers to renew their push for marketshare. Top CEOs acknowledged as much at the recent Annual Executive Conference For the P-C Industry.

Yet the CEOs also pointed out that insurers have a long way to go to achieve a respectable 15 percent rate of returnthe target required to draw badly needed capital. (Mr. Coyne noted that in the first three years of the current decade, the industrys rate of return has averaged only 2.8 percent.) The CEOs also cited significant hurdles sure to trip up anyone racing for more marketshare without a sensible regard for the bottom-line consequences. Among these hurdles, consider the following:

As long as interest rates are at historic lows and the stock market remains volatile, dont expect cash-flow underwriting to fuel a soft market anytime soon.

As long as insurers must reserve billions more to compensate for years of underpricing in the last soft market, they wont be able to afford to cut prices aggressively for business going forward.

As long as reinsurance recoverables are in substantial doubt, insurers are going to have to maintain a cushion to cover them in case their reinsurers leave them out to dry.

Are rates moderating? Certainly, but this is a natural adjustment. It is not a soft market, and it wont be for a couple of years at least. Insurers still must write insurance for a living if they hope to come near the 95-or-below combined ratio they need to achieve an acceptable rate of return. That fact points to reasonably firm rates for the near future.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.