This time around, with the Eurozone crisis and fragile economy presenting similar, though not identical, challenges, Willis says the onset of a hard market may once again be restrained. The broker notes that one difference between today and 2008 is “the big question mark that hung over the future of AIG at the end of 2008, which forced AIG to retain business and offered its rivals the chance to compete for AIG's business.”

Although this is not a factor today, Willis says that “demand can be expected to fall once again if the recession bites, which is not a good sign for insurers who want to put up their prices.”

Willis notes that the property market remains well capitalized. And while reinsurers are expected to put some upward pressure on rates during the Jan. 1 renewals, the market has still not seen a “game-changing” event that would cause a market turn.

The report cites the following September comments by Martin Sullivan, deputy chairman of Willis Group and CEO of Willis Global Solutions: “The current levels of overcapitalization may be reduced by losses and poor investment returns, but that should not return us to the bouts of capital starvation that drove market behavior in some of the earlier hard markets.”

ENERGY MARKET SEES COMPETITION; UNDERWRITING LOSSES

Speaking to the energy-insurance sector, Willis says loss ratios for most insurers continue to run at levels of 100+. Some insurers are withdrawing from the market, Willis says, but this has not yet had a significant impact on supply and demand levels.

The report notes that underwriters are being directed to achieve rate increases, but “whether market forces will allow them to succeed remains to be seen.”

Global underwriting capacity for the power-generation sector stands at close to $4 billion, with the capacity coming mostly from the general-property market and specialist power insurers. But Willis says there are signs of a change in appetite within the sector.

“In Lloyd's, there has been a shift in the alignment of capacity…,” the report says, noting that Lloyd's appetite for “lead” capacity at a primary level has diminished for international power business. Instead, Willis says, “Where Lloyd's capacity for this sector now tends to feature is on first excess of loss layers, i.e. capacity typically deployed above a primary limit of, say, $10 million to $25 million or more.”

Rates remain considerably lower compared to the previous hard market in 2003 for the power market, Willis says, noting that prices have come down by around 43 percent since then. “During this period, the sector has consistently posted underwriting losses, and this has continued in 2010-2011,” Willis says.

The industry has been hit recently by both “mega claims” events—such as damage at the Vasilikos power station in Cyprus from a munitions explosion at a nearby naval base in July 2011—and continued attritional losses.

Willis says, “Overall, in terms of underwriting returns, the power sector has not performed well over the past five or six years, and underwriters would like to introduce targeted rate increases. However, as long as the market remains well capitalized, there seems limited scope for underwriters to achieve them.

“Perhaps in recognition of this reality, some underwriters are choosing to place the emphasis on risk engineering as a means of driving down the sort of attritional losses that seem to have been a constant presence in the power sector.”

The Willis report is called “Power Market Review, December 2011.”