Market softening may be happening more swiftly than thought, said an investment analyst who also warned of difficulties ahead for some insurers in 2007.
In a recent note to investors, Bear Stearns analyst David Small said the primary insurance market is more competitive than was previously estimated, especially in the areas of nonproperty catastrophe coverage, middle market, and excess and surplus lines.
According to Mr. Small, Bear Stearns' most recent look at the property-casualty market found that “to maintain premium volumes, the largest insurers are not only being aggressive on pricing but are also pursuing riskier business.”
Several of the largest commercial lines companies, he added, are being very competitive for the business of midsized companies, and “in some instances are providing quotes for business that would previously have been placed in the excess and surplus lines market” of more difficult risks.
“To us, this is one of the clearer signs of a soft market–when large, admitted players move down market into E&S,” Mr. Small said.
For reinsurers, Mr. Small said that the market is a “mixed bag.” Although the reinsurance market appeared to be more stable than the primary market in early December, he said a recent check of the market indicated that “the softening may be faster than many have been anticipating.”
He noted property-catastrophe pricing remains strong, but the balance between supply and demand appears to be shifting and many in the market told him they believe there would be enough capacity for all programs, albeit at elevated prices, during the Jan. 1 renewal cycle.
Despite the softening, however, Mr. Small said the forming of captive insurers remains relatively strong. While not at the levels of the late-2000 to early-2001 hardening market, “those who have captives continue to view them as valuable risk management tools,” he said.
Effectively, Mr. Small said, those companies who become more comfortable managing their own risk through captive insurers are more likely to act opportunistically in purchasing coverage elsewhere. The effect of this could contribute to top line gains for insurers in hard markets and lead to increased difficulties in softer markets, he cautioned, adding that the latter could be a risk throughout 2007.
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