Will The Market Turn?
back to topBy Jack Roberts, in Insurance
Will the soft market ever end? Don’t bet on it even with all the horrendous catastrophes of the last few weeks. The constant handwringing over the low prices in the property-casualty markets means that you would think that insurers and brokers have learned to live with it. Overcapacity, economic slowdowns and aggressive competition have stayed events during the past few years that, in the past, would have shot prices way up. Fires, earthquakes, tsunamis, hurricanes, oil spills, and huge product liability judgments have only resulted in a short-term blip or two in prices. No broker or insurer can afford to ignore this trend and expect to survive, no less prosper.
The consensus among the “experts” today is that with the earthquake and tsunami, the reinsurance markets will turn. But even with these events–and the earthquake in New Zealand–the market still has about $500 billion in surplus and reserves. So the chance that this market-turning event will trickle down into the other markets is far from clear. Program administrators and brokers that I’ve talked with say that unless the economy improves, exposures will continue to shrink and the current glut in capacity will remain. That’s not the conditions needed to cause a hard market, although it may be closer to a bottom today than a year ago.
There are plenty of explanations about why prices don’t increase. In the short term, the industry has benefited from redundant reserves which have been able to shore up earnings. And look at the economy in general–except for commodities, business has learned to live with low or no inflation and the inability to increase price. As an industry, we are much better at assessing risk today. We know exposures, probabilities and profitable pricing, as Warren Buffet just pointed out. But we are victims, as he said, of “testosterone-driven” CEOs who refuse to let up on their demands for increased premium volume–even if it means they know that premiums are inadequate for the risk. So much for “underwriting discipline.”
Here at Breckenridge we see it in action all the time. Even though the pressure to increase price is escalating with loss ratios moving up, there are some insurers out there–no names–which go to extraordinary lengths to underprice the competition to get new business–or keep accounts on the books. The trend won’t go away. So much for the argument that insurance execs will forgo revenues to insure ongoing profitability. Even Buffet, who in the past suffered from some big losses in his insurance investments, saw insurance profits jump 38 percent and premium volumes rise by 10 percent.
Don’t ask us to speculate on when the market will turn–or whether it will turn. In a recent interview with SNL Insurance Daily, CEO Tracey Carragher said about the E&S markets: “Rates are not going to turn until the standard market starts hitting the wall. We are not waiting for a hard market. It is not in our plans, but it is in our prayers.”