Heading into the end of 2005, the Council of Insurance Agents and Brokers issued its third-quarter market report indicating that while pricing continued to trend downward in general as the soft market began to peter out, those surveyed said they were bracing for increases as a result of the losses insurers suffered from Hurricanes Katrina, Rita and Wilma. The evidence of a turnaround, noted CIAB, is anecdotal.

In the Southeast--which includes the heavily-hit states of Louisiana and Mississippi--survey respondents indicated that commercial property had been trending downward from July through September, with 52 percent reporting prices were down between 1 percent and 20 percent. Premiums among all size accounts were trending down or flat in the Southeast, the survey found.

However, listening to the chief executives of the major brokerage firms discuss prospects for the future with analysts during their recent third-quarter reports, it would appear that while the soft market might not be totally reversed by the catastrophe losses, at least the brakes will likely be slammed on its downward slide.

"The impact of the hurricane season in the U.S. insurance and reinsurance industry is uncertain," said Michael Cherkasky, president and chief executive officer of Marsh & McLennan Companies.

"We continue to work to get our clients the best deal possible," he added. "We are telling our clients that some markets are hardening. We believe this trend, especially in reinsurance, will have a positive impact on our 2006 performance, but that positive impact cannot, today, be quantified."

"Our industry has a long way to go before the full measure of the loss [from Hurricanes Katrina, Rita and Wilma] will be known," agreed Gregory C. Case, president and CEO of Aon. "It is too early to say whether we are going to see rate increases across the board, or only in specific lines and affected regions."

On the reinsurance side, he said, "rates may follow whatever happens in the primary market, but we are not convinced, at least not at this point, that the trend toward higher retentions will suddenly reverse."

Mr. Case continued that while "we know the industry has raised about $5.5 billion in new capital, most, if not all, represents lost capital. We've seen new entrants seeking to provide incremental reinsurance capital and we believe that the demand for new capital will increase in the near term."

Joe Plumeri, CEO and chairman of Willis, joined by other executives of the firm during a third-quarter conference call, cited anticipation of hardening rates in various lines of business.

Mario P. Vitale, CEO of Willis North America, noted that the 2005 hurricane season would have a short- and long-term impact on the market. The short-term effect would "reflect higher terms and conditions in pricing in certain areas." Long term, he continued, will mean more sophisticated catastrophe modeling and more stringent capital requirements for insurers.

Grahame Millwater, chairman and CEO of reinsurance for Willis, said catastrophe losses have hurt many reinsurers in Bermuda and London. New capital would replenish some of that lost capacity, while presenting new opportunities for others. "It is still too early to see how hurt [reinsurers] are," he noted.

He suggested that property, catastrophe, energy and marine lines would be the first to see an impact, but after five-to-six weeks of discussions with other executives, "there's still a long way to go before we see what the structure and program will be."

Talking to those outside of the major brokerage firms, the same market questions abound. But among independent agents, especially in average-size firms, there is a feeling that the ramifications of recent catastrophe losses might not be that deep.

"What I am hearing, mostly from talking to companies and other MGAs, is that nobody really knows for sure what the impact is going to be," said Francis Johnson, president of the American Association of Managing General Agents. "But really, for the first time ever, a [natural] catastrophe will probably change the market slightly."

"At a minimum, there will be big increases on big properties, especially coastal, and then [the increases] will come down in layers from there," added Mr. Johnson, who is president of Johnson and Johnson, an MGA in Charleston, S.C.

"Smaller coastal property, then general liability, professional liability--at a minimum they will flatten and possibly go up," he said. "Renewals on reinsurance treaties will see higher retentions and higher pricing, and that will trickle down to the MGAs, both domestic and internationally. That's the feeling I'm getting."

The bottom line on pricing, he said, will "depend on the line and where [the risk] is located."

As the Jan. 1 reinsurance treaty renewals come in, Mr. Johnson said the industry will then understand how this year's catastrophes affected each player. "Some will handle more retention without worry; others may take more retention" and increase prices.

"I think everybody is still waiting to see what losses reinsurers sustained and what the reinsurers will do," he said. "It will take a minimum of a year, because of Katrina, to figure out where we are."

The average independent agent might not have the same concerns about pricing due to the regional nature of their business and the carriers they deal with, according to William G. Stiglitz III, president of the Independent Insurance Agents and Brokers of America.

Mr. Stiglitz, an account executive with Hyland, Block, and Hyland in Louisville, Ky., said that from discussions he has had, regionally companies do not expect to see repercussions from the catastrophes--especially in the Midwest, where the market remains soft, with average reductions around 5 percent and significant competition among carriers to keep business.

"It's difficult to crack a new piece of business," he said. "People are happy with what they've got."

However, carriers are not irresponsible in their underwriting, he observed--staying competitive, but disciplined. "There's not a lot of crazy stuff going on," he added. "They like making money," he said of the carriers. "And they realize that their stock goes up when they make money."

He cautioned that while the average agent might not see a ripple effect from the disaster losses, it could be a different story for major agencies handling large accounts in the affected areas.

He noted that on the personal lines side, the direct and exclusive agent companies took a significant hit from the hurricanes and would probably need to adjust their underwriting to make up for the losses. However, independent agent companies did not take as serious a hit and would not have to make as radical an adjustment, he added.

On the commercial side, "I do not see a big shift in pricing," he said. "Commercial lines companies have become very sophisticated in their underwriting and can pinpoint risks," keeping pricing under control. However, he admitted that his pricing observations would not extend to the Gulf state region.

Pricing remains stable in the Northwest, observed Ray L. Peretti, president of the National Association of Professional Insurance Agents and owner of the Hub Insurance Agency (not affiliated with Hub International Group) in Renton, Wash.

"So far, so good--but we are not immune from the losses in the Gulf," he said. "The catastrophes can't help but have an effect on the rest of the country. It is still a competitive market, but companies like to get their rate where it will be profitable but keep competition low. There's always someone out there with a sharper pencil."

"My impression is that the price increases will be incremental," Mr. Peretti added. "It will start with a ripple effect. Pricing will work its way up here and there, but we will not see huge increases."

"The industry has been healthy, and its prospects continue to be good, despite the hurricanes. But with an extraordinary event like [Katrina], some companies have taken a shot in the gut," observed Mr. Peretti.

However, he added, "we are not going to see a crisis like we did in the 1980s when companies closed their doors. Companies are stronger and regulators work with better understanding that strong companies will not just bail out and walk away."

Group Quotebox, with mugs

Flag: Sounding Off

Head: What Producers Say About The Market

"The impact of the hurricane season in the U.S. insurance and reinsurance industry is uncertain. We continue to work to get our clients the best deal possible."

Michael Cherkasky, President & CEO

Marsh & McLennan Companies

"Our industry has a long way to go before the full measure of the [Katrina] loss will be known. It is too early to say whether we are going to see rate increases across the board, or only in specific lines and affected regions."

Gregory C. Case, President & CEO

Aon

"For the first time ever, a [natural] catastrophe will probably change the market slightly. At a minimum, there will be big increases on big properties, especially coastal, and then [the increases] will come down in layers from there."

Francis Johnson, President

AAMGA

"I do not see a big shift in pricing. Commercial line companies have become very sophisticated in their underwriting and can pinpoint risks."

William G. Stiglitz III, President

IIABA

"So far, so good--but we are not immune from the losses in the Gulf. Some companies have taken a shot in the gut, but we are not going to see a crisis like we did in the 1980s, when companies closed their doors."

Ray L. Peretti, President

PIA

Flag: Market Barometer

Head: Price Cuts Moderating

Caption:

Premium reductions averaged 4 percent last month, compared to 5 percent in September and 6 percent in August, according to MarketScout.com. However, for buyers, this still beats the market of a year ago, when the barometer found an average premium rate hike of 2 percent.

Source: MarketScout.com

Index with cover Art:

State Of The Market Index:

Intermediary View: Page 12

Reinsurance Outlook: Page 14

Bermuda Update: Page 15

Workers' Comp Report: Page S-1

Buyers' Perspective: Page 21