Fragile Market

“Fragile”, “transitional” and “volatile” – these are just a sample of the words being used to describe the current commercial insurance marketplace as presented at the recent “state of the market” seminar hosted by the Ontario chapter of RIMS Canada (ORIMS). While market surveys indicate price softening in many commercial lines, and speakers vouch for this turn in the market, many inconsistencies remain – and many reasons prices should not be dropping also exist, risk managers learned.

AGGRESSIVE ACTION

2003 saw Canadian insurers post strong financial results, which have carried through to the first half of 2004. However, with just one year of underwriting profit under their belts, insurers are already succumbing to competitive pressure to reduce rates, speakers at the seminar note.

Both “old” and the “new” capital players in the commercial insurance game are vying for business in the property class, notes David Mew, director of national broking for Aon Reed Stenhouse. While “old capital” players have seen improved results, which has loosened up purse strings to write more business, new capital has to compete to hold onto business won during the hard market.

Certainly, results in the property class warrant some celebration with the top writers able to drag claims ratios below 60%, Mew notes. And, he adds, “rate adequacy was reached by mid-2003, maybe even the end of 2002”. After that, there were some players continuing to increase rates opportunistically, he adds. In this respect, perhaps commercial property buyers are correct in expecting a price break, and Mew says there is room for insurers to come down in price and still maintain a technically correct rate. “The real test will be just that, to see if they go below the technical rate.”

However, insurers were not prepared for rate softening to set in quite so quickly. Many set premium targets which have not been met in an environment of flat to decreasing property rates. “We could see a fairly aggressive fourth quarter”, Mew says, if writers have not met budgets and are willing to fight it out for business. Much of this, as well, will depend on the eventual loss burden of this year’s Florida hurricane season, and specifically the loss tally resulting from Hurricane Ivan.

The London market has expressed an intention to resist competitive forces and reallocate capital rather than “follow the U.S. market down”, Mew observes. Nonetheless, he predicts an overall 10%-15% drop in property rates for 2005, although the expectation for complete information, higher retentions, sub-limits and strict terms will largely remain.

DROP ZONE

The casualty market remains volatile, says Andy Sloan, partner with Vince Tomenson Dickerson. “Where it is now versus where it will be in three months could be a very different story.” Sloan says the “roller-coaster ride” has actually become more of a “drop zone”. Although insurers appear to be showing some discipline on renewal business, which remains flat on pricing, “the bad news is they’re not showing that same discipline on new business”.

With insurers projecting double-digit growth targets in an economy growing at a low single-digit pace, “someone’s going to be eating someone else’s lunch”, he says of the competitive environment currently setting in. At the same time, insurers are moving back into lines of business which two years ago they withdrew from citing lack of expertise.

This environment may represent “nave confidence”, with many clouds on the casualty horizon, he notes. Under-reserved liabilities, the growth of class action lawsuits and contingency fees in Canada, and inaction on U.S. tort reform are just a few of the challenges which mean that it is perhaps premature for competition to be setting in and rates dropping on casualty business, he cautions. This is especially true given the unwillingness of shareholders to tolerate lack of profitability. In this sense, “the market correction that’s happening right now could easily be brief”, Sloan notes.

LINGERING LITIGATION

There may be fewer price breaks in specialty lines, specifically professional liability, but a return of capacity to the marketplace is being witnessed, says Adam Briklyn, vice president of Marsh Canada Ltd. “Very few underwriters lost their capacity [during the hard market], they just didn’t use it. We’re seeing a return back to primary underwriters using all of their capacity,” he explains.

There is specific interest in Canadian business on the part of specialty lines underwriters in London and Bermuda. “We’re in a healthy setting,” Briklyn says. This increased capacity is leading to a more predictable environment facing buyers – excess rating factors are decreasing, retentions are stabilizing and some risks are seeing the removal or moderation of restrictions, such as those on time limits for filing claims.

Large cap, clean risks are seeing rate discounts, Briklyn comments. “I don’t see [rate] increases unless you’ve had [financial] restatements, unless there’s a cloud over you.”

Even in the U.S., the frantic pace of securities lawsuit filings seen in 2001 and 2002 leveled off in 2003, and still further this year. However, 2003 did see the rise of mutual funds lawsuits, as well as several high-profile employment practices liability (EPL) lawsuits and fiduciary claims relative to pension plans.

Furthermore, there remains an inventory of 1,400 securities lawsuits pending in the U.S. with an estimated settlement value of US$25 billion – and cases such as Enron, WorldCom, Tyco and Adelphia have yet to reach the courts. Also of concern is the rising number of U.S. cases being filed by foreign interests, which now represent the highest percentage of new filings.

EARLY TURN

Softening in the primary market is being mirrored in the reinsurance market. This year’s January renewals saw modest price increases, however, the outlook for 2005 suggests either a flattening in rates or decreases in some cases, says Steve Halfpenny, vice president at Munich Reinsurance Co. of Canada.

Facultative reinsurance is already moderating, largely because it was the first line to harden, Halfpenny explains. Competition is also being seen in property-driven accounts, although the casualty market has yet to prove profitable and therefore lags in terms of price softening.

But, this kind of market downturn is premature, and may ultimately be unhealthy, Halfpenny adds, particularly given that Canadian insurers and reinsurers have merely posted one year of underwriting profit. “Is one year a hard market? Is that the clue that it’s time to start cutting each other’s throats again?” he asks.