Indeed, a significant percentage of brokers and commercial insurance buyers surveyed expect rates to remain the same or even decline, limits to rise, and terms and conditions to become more negotiable going forward.

“Commercial property-casualty premiums, while still on the rise, are not increasing as dramatically as a year or even six months ago,” concluded analysts at The Response Center, an independent research firm based in Fort Washington, Pa., that conducted the survey on behalf of NU and the study's sponsor, Zurich's North American Commercial Business division, based in Schaumburg, Ill.

“Both brokers and commercial insurance buyers agree that we continue to shift toward a softer market,” The Response Center said in its survey report.

Indeed, only 25 percent of the 208 brokers interviewed this March rated the hardness of the market as a 6 or 7 (with 7 equaling “very hard”) compared with 49 percent last fall. Commercial insurance buyers were in tune with their brokers, as only 31 percent of the 208 customers surveyed rated the market as a 6 or 7, compared with 49 percent in the fall of 2003.

“Across the board, although the majority of both brokers and corporate customers who participated in this spring's research experienced premium increases, significant minorities report no changes or actual declines for both general and specialty lines of business,” The Response Center noted. “The percentages of those interviewed in spring 2004 who report no changes or declines are up substantially from those interviewed in fall 2003.”

Looking forward, brokers and customers are both optimistic in their expectations for 2004, the survey found. “For most lines, increases in premium costs are still expected, but most predict increases will not be nearly as high as those experienced in the past two years,” The Response Center reported.

In surveying NU subscribers about the state of specific markets, The Response Center found that “among the general business lines of insurance, brokers and customers expect significant relief through either unchanged premiums or premium declines in commercial property, commercial auto and umbrella excess liability insurance.”

In specialty lines, “premiums for directors and officers insurance and medical malpractice insurance two lines in which customers experienced steep increases in the last two years (197 percent for D&O and 41 percent for medical malpractice in last fall's renewal cycle) are expected to stabilize somewhat in 2004,” The Response Center found. “In fact, customers predict that medical malpractice premiums will decrease by 2 percent, on average.”

In examining the responses of the two groups surveyed, for a number of lines brokers generally reported a higher percentage premium increase in their last renewal and expected a bigger hike to come than did the buyers who were queried.

One explanation for this is that while the buyers surveyed were mostly full-time risk managers at larger firms, the agent/broker community reading NU deals not only with such mega-buyers, but also with middle-market and Main Street insureds, which generally have less leverage and fewer options than their bigger brethren. This dichotomy tracks with the results of the “2003 RIMS Benchmark Survey,” put out by the Risk and Insurance Management Society and Advisen, a consulting firm, both based in New York.

“The hard market has not affected all insurance buyers equally,” the report noted. “The [Benchmark] Survey documents the disproportionate impact of rate increases on smaller companies. Companies with revenue less than $1 billion saw their cost of risk increase almost twice as much as large companies between 2001 and 2003, probably due to their lack of buying clout and less access to alternatives to traditional insurance.”

However, another dynamic might be coming into play for brokers, particularly when predicting price hikes for the next renewal, according to Keith Thomas, senior vice president overseeing Zurich's North America D&O business.

“Some of it, from the broker's perspective, could be that their business is becoming more competitive, and accounts are moving not only among insurers, but among brokers, over pricing issues,” he said. “Brokers don't want to project a lower price than they are certain they can deliver.”

Indeed, Zurich officials commented that while there is still room for price moderation in most lines, deep price reductions across-the-board remain unlikely anytime soon because there is no deep reservoir of investment income to count on to wash away potential underwriting losses.

“It would be very hard to have a sustained soft market in excess casualty right now,” said Robert Shine, executive vice president of Zurich's North America excess casualty specialty business. “There has been some significant tort reform proposed, but not yet passed, and we dont see the loss trends changing dramatically short-term. The market is also not as healthy capital-wise as it was before the last soft market.”

Greg Maguire, executive vice president and director of the property group for Zurich's North America Global Corporate Business division, added that “a lot of the post-9/11 capital is new and fragile. A major event man-made, like terrorism, or a natural catastrophe could stop this moderating market in its tracks.”

In the property-catastrophe market in particular, the absence of a major disaster has resulted in “the opposite of the perfect storm.'” said Mr. Maguire. “We have had the perfect calm.' Reinsurance capacity could dry up again in a hurry if there is another event, and that would reverberate throughout the market.”

The NU survey found that brokers and buyers not only expect price hikes to continue moderating, but anticipate more negotiating room on limits, terms and conditions as wella big difference from last fall. “While brokers and customers interviewed in the fall of 2003 generally expected little change in insurance coverage limits and restrictive terms and conditions, those interviewed this spring expect greater variance in coverage limits and restrictive terms and conditions compared with that experienced previously,” the survey report noted.

“More so than the brokers and customers interviewed last fall, a substantial percentage of those interviewed this past March expect coverage limits for commercial property, excess liability, property-catastrophe, business interruption, directors and officers, and employment practices insurance to go up,” The Response Center added. “For these same lines of insurance, higher percentages of respondents expect terms and conditions to either remain the same or be less restrictive.”

Even though market conditions appear to be easing up at last, most risk managers are still moving aggressively to reduce their cost of risk, the survey found. Indeed, about eight of 10 said they have increased loss control and safety efforts to cut their exposures, compared with 66 percent of those interviewed in fall 2003.

“During the hard market, many more insureds increased their retentionsoften substantially so they have much more skin in the game,” said Zurich's Mr. Maguire. “Because of that, buyers are much more interested in managing loss costs, so they have a greater focus on risk engineering.”

Mr. Shine added that “were seeing a very healthy trend as a result of the latest hard market, with buyers taking more ownership and accountability for their cost of risk, which has a much higher profile now that the price of coverage has risen over the past three years.”

With the hard market's moderation, the rush to the alternative markets appears to have slowed, the survey revealed. Indeed, this spring, “significantly fewer [brokers] report that clients increased the amount they self-insure compared with those interviewed in the fall 2003 survey (44 percent this year, compared with 59 percent last fall),” The Response Center noted. “Similarly, fewer report that any of their clients formed a captive83 percent versus 93 percent.

In addition, in the attitudes portion of the survey, 59 percent of buyers queried agreed that “we are comfortable with self-insuring more of our exposures, whether through higher deductibles or self-insurance vehicles such as captives,” compared with 76 percent last fall.

Beyond the easing of pricing and coverage concerns, Mr. Thomas of Zurich said that “many buyers who might have looked into the alternative markets ran into the same issues primary carriers confronted lower investment yields, the high cost of reinsurance and that may have discouraged them from leaving the traditional market.”

Quotebox: (awaiting mug)

“A lot of the post-9-11 capital is new and fragile. A major eventman-made, like terrorism, or a natural catastrophecould stop this moderating market in its tracks.
Greg Maguire
Executive V.P.
Zurich

Quotebox: (with Thomas mug)

“Another dynamic that may be contributing to the discrepancy between brokers' and buyers' price predictions is that brokers dont want to project a lower price than they are certain they can deliver.

Keith Thomas
Senior V.P.D&O Markets
Zurich

Captions For Graphics: (Place in this order)
For State Of Market Today Bar Graph (two graphs side by side–brokers, customers):

Flag: As The Market Turns
Head: P&C Pricing Pressure Easing
Both brokers and buyers indicate that market conditions continue to shift from a “very hard” market 12-to-18 months ago and have softened even more from a “somewhat hard” market in fall 2003.

For Legend above 13 individual market graphs, run with legend itself:
Head: About The Charts
The following charts are based on the responses of 208 brokers and 208 corporate insurance buyers surveyed by The Response Center. Each graph shows the last renewal rate change experienced (listed above “current”) and the anticipated change in the next renewal (listed as “future”) cited by brokers and buyers queried last fall and this spring.

Flag: Commercial Property
Head: Buyers More Bullish
Sixty-two percent of brokers expect a rate hike in their next renewal (averaging 8 percent) while less than half of buyers expect an increase, 30 percent expect a rate cut, and the average gain buyers anticipate is only 2 percent.

Flag: Property-Catastrophe
Head: Buyers Expect Big Drop
Even though it has been awhile since the market experienced a mega-event, 60 percent of brokers still expect a price hikebut one averaging less than 10 percent. Customers are much more optimistic about what lies ahead.

Flag: Workers' Compensation
Head: Comp Leveling Off
Both buyers and sellers are seeing a decline in the volatile workers' comp market, although a lot depends on the industry and state in which a company operates. Few from either group expect price cuts here anytime soon.

Flag: Business Interruption
Head: Brokers, Buyers Differ
When it came to business interruption, brokersmany of whom deal with middle-market clientshad a worse experience this spring in quoting business than the larger customers included in this survey. Seventy-one percent of brokers expect hikes ahead to average 9 percent, while risk managers anticipate little change.

Flag: Terrorism
Head: Despite Iraq, Rates Level Off
Both buyers and brokers expect rate increases for terrorism coverage to drop into the low single digits. If Congress fails to extend its terrorism insurance program soon, however, rates could soar and capacity could dry up in a hurry.

Flag: Commercial Auto
Head: Brokers More Pessimistic
Seventy-three percent of brokers expect rates to rise, with the average at 9 percent, but only half of buyers see more hikes coming, while a little over one-third expect rates to stay the same.

Flag: General Liability
Head: Market Keeps Moderating
The latest premium hikes in this line remained in the double digits, but looking ahead, both brokers and buyers expect more price moderation. One in five buyers anticipates a price cut.

Flag: Umbrella Excess Liability
Head: Rainy Days Continue
Half of the buyers and two-thirds of brokers surveyed expect premium hikes in this line, although once again, buyers are far more optimistic about the level of increases to come.

Flag: D&O
Head: Dramatic Improvement Seen
Major corporate buyers were hammered by D&O carriers last year, with rates nearly tripling. This year, buyers saw rates rise 21 percent, but optimistically expect that to drop to a 6 percent raise. Brokers see double-digit increases ahead, and less than one in 10 expects a rate cut.

Flag: Employment Practices
Head: EPLI Rate Hikes Easing
As with D&O, buyers were hit hard last year, with an average EPLI rate hike of 50 percent. Brokers, dealing in a broader-based clientele, had more moderate experience, but this line was no picnic for them, either. Looking ahead, rate hike expectations appear to be leveling off.

Flag: Environmental Liability
Head: Pollution Premium Hikes Moderating
Both buyers and brokers expect relatively low single-digit increases ahead for pollution-related risks. Two-thirds of buyers expect rates to stay the same going forward.

Flag: Product Liability
Head: Buyers Expect Big Drop
Even though they reported an average increase this spring of 23 percent, a steeper hike than last fall, only about half expect rates to keep rising, with the average gain at only 3 percent.

Flag: Medical Malpractice
Head: Is There A Doctor In The House?
Brokers surveyed had far worse experience and expectations this year than the very few corporate buyers surveyed who purchased medical malpractice coveragethree-quarters of which expect either a rate cut or a renewal at the same price.

Stress Level Down Among Buyers, Brokers

Survey finds fewer having beefs with carriers over service-related issues

By Sam Friedman

There's a lot less tension in the air among buyers, brokers and insurers these days, and not just because prices, limits, terms and conditions all appear to be improving substantially for risk managers, the National Underwriter “State of the Market” survey found.

Indeed, whether it involves their comfort level with the financial security of insurers or their satisfaction with services received, corporate insurance buyers are a much more copasetic lot this spring than last fall, when the remnants of the hard market were still creating stress for risk managers and their brokers alike.

The NU survey this March of 208 brokers and 208 corporate insurance buyers who subscribe to NU, for example, found much less concern over whether carriers will have the money to pay claims down the road. Sixty percent of the brokers surveyed agreed with the statement, “Our clients are comfortable with the financial stability of their insurance carriers,” compared with just 38 percent last fall. Among buyers surveyed, 56 percent agreed, compared with 47 percent in the last survey.

The survey, sponsored by Zurich's North American Commercial Business division, based in Schaumburg, Ill., also found that with pricing pressures easing considerably, fewer risk managers and brokers believe carriers “took advantage of buyers in the hard insurance market.” Among buyers queried, 54 percent agree they were taken advantage of, compared with 61 percent in the fall. Among brokers, 43 percent agreed this time around, down from 49 percent last year.

Interestingly, in a new question asked this spring, 38 percent of brokers agreed that “when the market softens, our clients are likely to change carriers to obtain lower prices,” while among buyers surveyed, only 22 percent agreed with that same statement.

“There was a major upheaval in the property market following the terrorist attacks of 9/11, and we learned a lot about each other over the last few years,” said Greg Maguire, executive vice president and director of the property group for Zurich's North American Global Corporate Business unit. “Buyers are more interested in trying to develop some stability going forward.”

“Most buyers are tired of the cycle, tired of changing carriers and worrying about financial stability when shopping for insurers,” added Robert Shine, executive vice president of Zurich's North American specialty division's excess casualty business. “Within reason, they are not going to change carriers in a knee-jerk reaction over price. Many are looking for a long-term relationship.”

In general, buyers appeared happy with their industry service providers. On broker services, 86 percent said they were very satisfied (compared with 79 percent last fall), while some 80 percent felt the same about their claims and risk engineering servicesclosely tracking the fall results.

One sore point in particular seems to have improved somewhat since last fall's survey. This spring, 25 percent of buyers queried agreed that “we receive our final insurance policies in a timely fashion, error-free,” compared with only 8 percent last year. Among brokers, 34 percent agreed, against 14 percent in fall 2003. While that still means that a vast majority of both segments believe carriers fail to hand over their final policies in a timely fashion without any mistakes, it's still a big improvement.

Among the buyers questioned by The Response Centeran independent research firm based in Fort Washington, Pa., that conducted the survey on behalf of NU and Zurichthere was a marked increase in the number of those who would “prefer to have the same carrier/carriers provide both international and domestic coverage”48 percent compared with just 26 percent in the fall. Among brokers, 42 percent felt that their clients would want the same carriers either here or abroad, compared with 28 percent last year.

With prices dropping, fewer buyers and brokers appear to want to lock in multiyear coverage. However, buyers still seem more intrigued overall by the concept, with 71 percent of those surveyed this year expressing interest (down from 75 percent last year) versus 42 percent of brokers (down from 53 percent).

Among buyers, there was a gain in the percentage interested in “integrated, total enterprise risk solutions”35 percent, up from 29 percent last year. Brokers, on the other hand, are less enthusiastic about the idea of linking multiple coverages in a single program26 percent agreed their clients are interested in such deals, down from 32 percent last fall.

Quotebox: with Shines mug

“Within reason, buyers are not going to change carriers in a knee-jerk reaction over price. Many are looking for a long-term relationship.
Robert Shine
Executive V.P.Excess Casualty
Zurich

For Graphics:
For Alternative Market Table:
Flag: Pressure Eases

Headline: Fewer Buyers Seek Alternative Market
With insurance price hikes moderating, fewer buyers are looking to bail out of the traditional market, with captive activity less intense. However, many more buyers boosted loss control and safety efforts to cut their cost of risk.

Flag: Customer Attitudes
Head: Buyers Begin To Chill Out
More buyers feel comfortable with their insurer's financial soundness, and three times as many are getting their policies in a timely way, without mistakes.

Flag: Broker Attitudes
Head: Price-Shopping Feared
Over one-third of brokers surveyed said clients would likely change carriers to get better prices as the market softens. Interestingly, only 22 percent of buyers surveyed said they were likely to bail out on their current insurer over pricing concerns.

Market Heats Up, But No Meltdown Expected

Underwriters vow to hold the line on right price to assure continued profitability

By Sam Friedman

Now that commercial insurance coverage is available at less onerous rates and often at more attractive terms and conditions, will underwriters remain as hard to please as Simon Cowellthe brutally honest and demanding judge of “American Idol” fame? Or will they become pushovers, with price competition heating up too quickly, prompting another market meltdown?

That's the key question raised in light of the market softening indicated by risk managers and brokers responding to the latest National Underwriter “State of the Market” survey, sponsored by Zurich's North American Commercial Business division in Schaumburg, Ill.

Over the past few months, in numerous public forums, top industry officials have insisted that given the uncertainty of the investment markets, insurers will not be pricing aggressively for marketshare, but instead will focus on maintaining underwriting profitability.

The survey indicated that brokers and their clients realize they are not anywhere near a full-fledged soft market, and are not eager to move their business purely on pricing considerations.

Indeed, among the 208 buyers surveyed, only 22 percent strongly agreed that “when the market softens, we are likely to change carriers to obtain lower prices.” Brokers responding to the same question were less sanguine about buyer loyalty, with 38 percent believing strongly that their clients will be “likely” to flip insurers if it means getting a better price.

James Schiro, chief executive officer of Zurich Financial Services Groupthe Switzerland-based parent of the NU survey's sponsorbelieves that buyers will stick with carriers that properly underwrite their risks, provide value-added service and offer the financial security to pay claims.

“The expectation of more moderate price fluctuations, a uniform application of terms and conditions over the cycle, and the capacity to meet your long-term needs are clearly goals for which we can all aim,” he said in his keynote address last month in San Diego during the Risk and Insurance Management Society's annual conference.

“In this context, I believe buyers would be willing to pay the 'right' or technically correct price for the exposures you wish to cover,” he added. “I also believe that working to moderate price fluctuations in the insurance cycle is in the best interests of all of us, and will have a positive impact on everyone's bottom line.”

In a press conference at the RIMS meeting following his speech, Mr. Schiro said his belief that risk managers would be willing to accept “technically correct” prices in an increasingly competitive market is “not wishful thinking.” He explained that by “educating” both brokers and risk managers about the long-term benefits of rational pricing, sophisticated buyers would not move their business from carriers that offer financial security, excellent claims service and unique risk management solutions just to get a cheaper price.

Although rates are trending downward and more capacity appears to be available these days, leading risk managers are not ready to dismiss hard market concerns going forward.

“I'm not sure we're seeing the 'right' price yet,” according to Lance Ewing, who completed his term as RIMS president shortly after the group's annual conference. “We're not seeing reductions everywhere,” he said during a press conference at the RIMS meeting, citing the oil and gas industries, as well as his own entertainment sector, as examples. “Any area with a concentration of risk is still hard put to get cheaper coverage.”

He also noted that “captive growth is still booming, there are larger retentions being taken, and some people are simply walking away from buying certain lines, like terrorism, just because they won't buy the coverage at those prices.”

Mr. Ewing, who is vice president of risk management at Caesars Entertainment Inc. in Las Vegas, indicated there still might be trouble ahead for buyers. “Stability is truly in the eye of the beholder,” he said. “We are still in a fragile insurance market. Imagine another terrorist attack, another major hurricane. I'm cautiously optimistic, but we're still walking on eggshells here. It's premature to say the market has been corrected.”

Officials from the Lloyd's of London market were equally cautious about declaring an end to insurance capacity and pricing concerns. Worried about “complacency” after enjoying a banner year, Lloyd's market leaders vowed to keep a close eye on syndicates to make sure they continue pricing business to produce an underwriting profit in the face of a more competitive global market.

“We do need to keep in mind that, to a certain extent, we and the entire insurance market were lucky in terms of disaster losses,” said Julian James, director of worldwide markets at Lloyd's, during a press gathering at the RIMS conference.

Noting that the U.S. primary insurance industry posted a combined ratio of 100.1 last year, while U.S. reinsurers came in at 101.2, he pointed out that “our 90.7 ratio is where analysts say you must be to assure an adequate rate of return to investors. Yet clearly the industry as a whole is not there yet despite low catastrophe losses.”

Indeed, based on recent price firming, the industrys combined ratio should improve from last years 100.1 to 98.8 in 2004its best bottom-line result since 1978, when it achieved a combined ratio of 97.4according to Frank J. Coyne, chairman, president and CEO of the Insurance Services Office in Jersey City, N.J.

However, in remarks during the RIMS conference, Mr. Coyne noted that with current investment results, tax rates and financial leverage, ISO calculates the industry would have to achieve a combined ratio of 94.3 to reach a 15 percent rate of returna result achieved only once in the past 20 years, in 1986.

“The good news for insurers is that their rate of return for 2003 was more than eight times their rate of return in 2002,” said Mr. Coyne. “The bad news is that their rate of return for 2003 was just 9.4 percentnot a lot of profit for assuming all the risk inherent in their business. Indeed, if anything is remarkable about the state of insurance markets, its the signs that the next soft market may be approaching, even though insurers rate of return was just 9.4 percent in 2003.”

Improving the industry's ROE will be difficult if ISO's premium volume prediction comes to pass. “ISO projects premium growth will dwindle to 4.7 percent from 9.8 percent last year,” Mr. Coyne said. Indeed, he added, with industry surplus having risen to a record $347 billion at year-end 2003, “is it any coincidence competition is returning?”

Brokers are running scared as well.

“With softening market conditions returning to most lines, brokers expressed concern that it is only a matter of time before insurers push aside the stricter underwriting standards of the last few years and start going after new business by premium-cutting,” said the Council of Insurance Agents & Brokers in Washington, D.C., analyzing its own quarterly membership survey results. “If that happens, several [brokers] said, the financial stability of carriers moves back to the top of a list of concerns.”

“We fear that insurers may get back into stupid season,” said a broker from the Southwest surveyed by CIAB. “Softening pricing is a recipe for another awful cycle of insolvencies,” warned a second broker from the Pacific Northwest.

Still, Mr. James of Lloyd's insisted that savvy underwriters will not return to the days of giving coverage away in return for marketshare. “The industry must maintain underwriting profitability. That is the only sustainable, winning business strategy,” he said.

Lloyd's syndicates are “not going to increase their profits by taking on more business that loses money,” added Lord Peter Levene, chairman of Lloyd's. “They just can't wave a magic wand and produce more profits simply by stamping their name on more risks no matter what the price. They have to continue to write business rationally. This is how we hope to assure continued profitability even during down markets and to avoid massive losses in any given year.”

The Lloyd's market has the advantage of having a Franchise Board oversight system in place that can hold syndicates accountable if they begin underpricing business to boost premium volume at the risk of underwriting profits. The broader market has no such body to look over underwriters' shoulders. However, that doesn't mean insurers will be racing to get marketshare at the expense of profitability?not with historically low interest rates, a volatile stock market, and the threat of terrorism and catastrophe losses looming.

“We are not going to get into a marketshare game,” emphasized Mr. Schiro of Zurich during his RIMS press conference. “We are working for an underwriting profit. That's what it takes to be a top-tier insurer, and it's the top-tier carriers that will be around for buyers over the long haul.”

“If someone underprices us by 25 percent or more, the buyer really has to consider the long-term costs of moving to such a carrier,” added Geoff Riddell, CEO of Zurich's global corporate business, during the RIMS press conference. “Those who offer wildly cheaper prices and irresponsibly broader terms of coverage may not be there to pay claims down the road.”

Nancy Chambers, a Canadian who took over as the new president of RIMS this month, chose to look on the bright side during a press conference at her group's annual meeting. Even if underwriters remain as hard to please as “American Idol” judge Simon Cowell, buyers should seize the chance to prove they have their exposures under control.

“This is an opportunity for risk managers to work with their brokers to truly market their programs to underwriters, who are still looking carefully at all their risks,” said Ms. Chambers, who is risk manager at the Waterloo Region Municipalities Insurance Pool in Kitchener, Ontario. “You need to raise their comfort level to get the price that truly reflects your exposure.”

Table Captions:

Flag: Broker Expectations
Head: Is The Sky The Limit?
A large percentage of brokers expect available coverage limits to go up for several linesespecially commercial property and property-catastrophe. However, a higher percentage of brokers than buyers expect terms and conditions to become more restrictive in certain troubled lines, such as D&O and medical malpractice.

Flag: Customer Expectations
Head: Buyers Expect Status Quo
The majority of corporate customers are much less optimistic than their brokers about seeing a rise in available limits. However, buyers are less concerned than brokers about a tightening in coverage terms and conditions.

Quotebox for Schiro (with mug)

“I believe buyers would be willing to pay the 'right' or technically correct priceI also believe that working to moderate price fluctuations in the insurance cycle is in the best interests of all of us and will have a positive impact on everyone's bottom line.
James Schiro
CEO
Zurich Financial Services Group

Quotebox for Ewing: (with mug)

“I'm not sure we're seeing the 'right' price yet. We're not seeing reductions everywhereAny area with a concentration of risk is still hard put to get cheaper coverage.
Lance Ewing
Immediate Past President
RIMS

Lord Levene Quotebox: (with mug)

“Underwriters are not going to increase their profits by taking on more business that loses money. They just can't wave a magic wand and produce more profitsThey have to continue to write business rationally.

Lord Peter Levene
Chairman
Lloyd's Of London

Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 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.