It's Coming Eventually, But This Time We're Ready for It

By Geoff Smith
April 25, 2003

I hate to be the one to bring it up, but…you know it's coming. It's lurking, ready to pounce. Not as bad as the 1970s or 1980s, or to the depths of the late 1990s or 2000, perhaps. But it will come again. It always does, eventually.

I'm referring to the soft market, a forbidden term for many as we experience a thriving hard market. One thing I've learned in nearly 35 years in this business is that the industry is cyclical and a soft market will return.

Why should insurance executives be concerned with an unknown soft market when the hard market is still going strong? Because some recent analyst reports demonstrate that there are differences in opinion about what kind of "legs" the hard market has.

And the fact there is any discussion about the strength of the hard market should give insurers pause; it should be an invitation to begin preparing how to differentiate your company for when the soft market does occur.

Has the Hard Market Peaked?
According to a January 2003 report by The Council of Insurance Agents & Brokers (CIAB), the fourth quarter 2002 commercial market index revealed that "commercial property/casualty insurance premiums, although moderating somewhat compared with earlier survey results, were continuing to march upward."

The CIAB press release announcing the report states that the commercial market is well into its second year of hard-market conditions, and that a substantial part of the commercial market continues to watch premiums increase across the board. CIAB notes that there is little indication that the market is softening in any significant way for any line of business or for any size of account.

In its survey of the nation's leading insurance brokers, CIAB found that more than two-thirds of the small and medium-sized commercial property/casualty accounts and 59 percent of the large accounts experienced premium increases between 10 and 30 percent during the last three months of 2002.

In the same month, Morgan Stanley issued a report, 2003 Outlook: Looks Like Goldilocks not Nirvana, that acknowledges the hard market but, at the same time, nudges us in the direction of preparing for the next cycle.

The Morgan Stanley report states that the hard market continues, but "nirvana" is not in sight. It reports, "While favorable conditions prevail, we believe the market is not as 'hard' as previous upturns, and will not become so. It appears the market is at or near its peak. But, unlike past cycles, that does not necessarily imply a quick falloff in pricing; rather a 'Goldilocks' scenario could continue for awhile." The report states that despite an upturn in cash flows, the industry as a whole is not building capital, reserves, or "float" in a meaningful way.

Still Time to Get Everything In Order
Okay, so it's not the worst of times, but as this last report conveys, perhaps it's not the best of times either. The soft market may not occur as suddenly as it has in the past and that's the good news because it means there's still time to get everything in order.

Editor's Note: To see the full story, see the April 21 issue of Insurance Journal West. Geoff Smith is executive vice president and chief operating officer of ePolicy Solutions, Inc. (www.epolicysolutions.com). Previously, he spent 30 years at The Hartford.