“First, the industry must endure a sustained period of large underwriting losses. Only when underwriting losses are large and sustained do insurers turn disciplined, Hartwig said.”
Granted, this is not noticebly occurring, but one wonders after the take down of older reserevs how sufficient newer reserves are and how much taking down of older reserves are left to make current results look betetr than they really are. Our current results may not be as good as published numbers. We may be further down this road than it appears.
“Second, the industry suffers a material decline in industry surplus or capacity. When surplus falls, rates rise as customers compete for access to the surplus.”
The industry suffered a huge decline in surplus with the near demise of AIG. Unfortunately the Federal government stepped in with $182 B in surplus. The government most likely will not step in again to save another stupid mistake as AIG committed (and perhaps are committing again as we speak).
“Third, the reinsurance market must be ‘tight,’ meaning reinsurance costs are rising and there is a shortage of reinsurance capital.”
Is the tightening of the reinsurance market a cause or an effect? I think the actions of the reinsurance market are more closely linked to what’s going on in the insurance market than the writer alludes to. Will the insurance market harden because of what the reinsurers do or will reinsurers take actions due to the impact of everything stated up? I believe these things will coincide and not happen just because of what the reinsurers do. We’re all in the same boat.
“Finally, the industry must show renewed underwriting and pricing discipline.”
Another is this a cause or effect? The industry at some point will be forced to take such corrective action, it is not that such corrective action will cause the market to turn.
In conclusion, I disagree with Hartwig that this is further down the road or will not be a “traditional hard market”. I just know the longer it takes to turn, the harder it will ultimately be.
Dave, I agree with much of what you say. I have been in this business for over 30 years and I have not seen anything quite like this. Carriers would love to take large rate increases, but are unable to because of the very poor economy. The hard market is easier to get through if the economy is good, but when it is bad, insureds will go another way and there always seems to be someone who will do it for less or the customer will buy reduced coverage to get to the bottom line. I have carriers who say they must take a 20% jump to clean up their book, even on loss free customers. I ask them what 100% of nothing is. If they run enough customers off, they will feel the pinch in the coming year or two.
Agent, the form any change in the market will take is dependent on too many things to accurately predict. How bad will things become for the insurers, will any or how many companies will go belly up, will companies take across the board initiatives or do it case by case, in an opportune time will new captial flush into the market? Too many unknowns. But I do know current conditions cannot exist too much longer, especially if there are a series of Cat losses or even just two or three big ones. As an underwriter I hope the company I work for gives me the opportunity to inflict less pain on insureds and their brokers who have treated me fairly. But senior managers do not always allow for such rationalization. I guess we’ll all see when it happens.
You are right Dave. We have too many unknowns which can take this market down or it could right itself. I think carriers are watching which way the political landscape will unfold just like other business is doing and make plans accordingly. I talk to a lot of marketing reps who say we have the worst nightmare in place currently and the insurance marketplace will not straighten up until the country is a friendlier place to do business. You can talk about reserves, combined ratios all you want, but in the end, it is all about the economy and what will happen there to determine everyones future.
friendly place? what are you talking about? US is ranked 5th in the world in “ease of doing business.” (no link supplied, just google it) In the insurance industry it is that states that create the difficulty with different laws, customs and regulations in 50 states and in every territory/commonwealth.
June 28, 2012 at 9:33 am
Agent says:
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Hey Huh! Why don’t you ask a small businessman or a manufacturer, a contractor or even retail store how easy it is to do business now in this country. Our government is so oppressive with mountains of regulation, the EPA seems bent with attacking business in all parts of the country and taxes on every level are going up. On top of that, we have the possibility of Obamacare kicking in and forcing employers to buy health insurance or face fines or additional taxes. This is the European model and if you have been paying attention, Europe is imploding and the Euro is about to go away. That will have a profound effect on our economy and make it worse to do business. That will also hurt the insurance industry in these difficult times.
June 26, 2012 at 3:04 pm
Michael Ryan says:
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Your first point is spot-on, and many Carrier’s profitability in recent years is solely due to reserve take downs, which is a finite kettle from which to draw. The second point is inaccurate. The surplus of the insurance operation subsidiaries of AIG is regulated at the state level, in accordance with the law. The insurance operations did not, and could not, offer a single dollar of monetary support to the parent AIG during the 2008 crisis, because that money is legally restricted for the benefit of the policyholders. As well, the industry suffered no “huge decline” in surplus – the decline in U.S. surplus after the September 2008 crisis was only 4.2% at the end of the first quarter of 2009, which was nearly entirely unrealized losses on investment portfolios when the market was crashing. The U.S. Policyholder Surplus of AIG’s insurance subsidiaries grew modestly from $26.1 to $27.7 billion from 2008 to 2009, which clearly has no relevance or reflection to the government’s involvement with the parent AIG. On the balance of the discussion, many of the key carriers are now operating on a very light leverage ratio – their premium to PHS ratio is at or less than 1:1. This means that while they are amply capitalized to write far more premium, they are choosing not to do so. As Insurance Carriers adapt themselves to more closely mirror “financial organizations”, and implement predictive modeling to attempt to narrow loss fluctuations, they will choose to allocate their capital where the financial return is the greatest. That may be by NOT writing insurance when the rate of return is projected as less than can be made solely through investing. This balancing act, correlative between the investment market and insurance rates, will eventually find a narrow band of variance. When insurance rates improve, carriers will pursue increased premiums for better returns, until such time as their re-entry into the insurance market sways the supply/demand curve and drives the rates back down. I foresee micro-cycles in the marketplace being both inevitable and the new norm.
Dave,
Your comments are very thoughtful. Another area that I think Hartwig did not pay sufficient attention to is the Fed’s negative interest rate policy & its effect on investment income return which historically has been critical to profitability. With the rate of inflation well in excess of returns on fixed income, cash etc. the only way left is to make an Underwriting profit.
If the market was still working, & I contend it is not, the hard market should already be upon us.
Would value your thoughts.
Raider, I feel sorry for you in California. You have an extremely liberal government which is bankrupt and they are not inclined to make the reforms necessary to right the ship. In Texas, we had reform of the Workers Compensation system several years ago and it has worked to stabilize the rates and put it in a profitable posture. Companies like it, want it and will cut prices to get a good account.
In Texas, at least we have our own rating plan for modifiers. I understand in other states, NCCI have imposed much higher factors for calculation of mods so it doesnt take much to have an account’s mod to go to crap because of the calculations.
Hartwig is right on all points but wrong in assuming that there still is an an insurance market, that might bring back a hard market.
As long as the giant insurance zombie also know as AIG, continues to unfairly compete against the prudent carriers, there is zero chance of a hard market. There are also other major European carriers that do business here, that are about to fail as AIG did. They are heavily exposed to failing banks & Sovereign bonds{Greece, Spain,Italy etc.}. Is anyone paying attention to what is happening there? AIG set the precedent for their future bailouts to come!
On what basis is your comment that Chartis9Formerly AIG/Soon to be AIG again) is unfairly competing against so called “prudent” carriers? I can tell you that working at Chartis and being charged with, measured by and performance standards based upon obtaining right price for risks and seeking and obtaining rate increases on current book.
If you call Travelers, Markel, ACE, XL, Catlin or Zurich “prudent” carriers, I really question how much of an industry veteran you really are.
The problem is that most brokers and underwriters are used to being order takers and givers, they know nothing of learning about what their insureds do or develop relationships with each other on a business level.
They are all about cheapest price for most coverage and let the risks and facts be damned…
That is the current industry and why I dislike it so much and long for the days when both sides could have an intelligent discussion about the risk and exposures and both sides knew what they were talking about…
Under, I can appreciate your position trying to do the right thing. I think a lot of agents, not brokers have run up against AIG/Chartis back in the soft market salad days and saw what was going on with what they would do to write a risk. Back when AIG was caught along with other carriers doing bid rigging with Marsh Mc did not sit well with a lot of people. I don’t think there are many prudent carriers out there today. They are driving us crazy with unwarranted rate increases and forcing us to shop the market to try to get something the customer will live with. This all has to do with Combined L/R, reserves, capital etc. Instead of moderating rate increases, they are wanting too much increase all at once. This is patently unfair, but it is what it is for now.
I see Chartis’s prices everyday. And getting 5-7% rate increases on renewal business under-priced by 30%, 40%, 50% doesn’t cut it. And having free reign to charge what is wanted on new business means replacing lost renewal business with even cheaper new business. Having to increase reserves by several billions in both 2009 and 2010 says a lot about past pricing and reserving practices. I guess we’ll see soon enough as old losses once again catch up with them.
Wouldn’t a hard market require underwriters to actually price risks appropriately. I’m an underwriter and what I see the rest of the market doing is just insane. It’s basically a “name your price” environment. Carriers try to push rate increases and the brokers just move it to whoever is willing to continue cutting price. It’s not even just pricing either. The coverage enhancements being thrown at some bad risks is just crazy. I can’t tell you how many pissy phone calls I’ve taken from brokers saying “wait…you want to charge an AP to increase policy limits….xyz carrier does that for free” Fine, then place your business with them and don’t come crying to me when they pull out of the market and you have to move an entire book of business…again. There’s plenty of blame to go around. For us few underwriters actually trying to price these risk adequately, there’s nothing more we can do but try to push coverage vs price. Most agents don’t want to hear it though. Renewal goes up from $40k to $50k after whacking the carrier with several claims, and they come in barking orders for a premium DECREASE!
I empathize with you Joker and also agree there is plenty of blame to go around. What we as agents have to deal with is the customer looking eyeball to eyeball. Most cannot understand why a carrier wants a 20% price increase when they have yet to pay a claim on their business. Give the rate increase to accounts who have had losses, keep the rate increase moderate on the good accounts. I can sell 5-7%, but not 20% on the better accounts.
You are right Veteran. Anyone who thinks they have this figured out is probably wrong. If Europe goes down, it will affect the US adversely. There are a lot of markets over there from Lloyds to Zurich to several reinsurers who will dictate terms to the US market. The small regional carriers out there are very vulnerable to re-insurance rate increases and must raise their rates or go out of business. I can see a round of acquisitions from the big players acquiring smaller companies and consolidating business. AIG/Chartis are bad actors and probably will be allowed to gobble up more business even though they still owe $80 Billion to the taxpayers. We will end up with a much smaller number of big players in the market. These are the guys who can grease the palms of our elected representatives to get special deals. Warren Buffet is one of the chief recipients of special favors.
Unusually concise, accurate as B Hartwig usually is. RAF
“First, the industry must endure a sustained period of large underwriting losses. Only when underwriting losses are large and sustained do insurers turn disciplined, Hartwig said.”
Granted, this is not noticebly occurring, but one wonders after the take down of older reserevs how sufficient newer reserves are and how much taking down of older reserves are left to make current results look betetr than they really are. Our current results may not be as good as published numbers. We may be further down this road than it appears.
“Second, the industry suffers a material decline in industry surplus or capacity. When surplus falls, rates rise as customers compete for access to the surplus.”
The industry suffered a huge decline in surplus with the near demise of AIG. Unfortunately the Federal government stepped in with $182 B in surplus. The government most likely will not step in again to save another stupid mistake as AIG committed (and perhaps are committing again as we speak).
“Third, the reinsurance market must be ‘tight,’ meaning reinsurance costs are rising and there is a shortage of reinsurance capital.”
Is the tightening of the reinsurance market a cause or an effect? I think the actions of the reinsurance market are more closely linked to what’s going on in the insurance market than the writer alludes to. Will the insurance market harden because of what the reinsurers do or will reinsurers take actions due to the impact of everything stated up? I believe these things will coincide and not happen just because of what the reinsurers do. We’re all in the same boat.
“Finally, the industry must show renewed underwriting and pricing discipline.”
Another is this a cause or effect? The industry at some point will be forced to take such corrective action, it is not that such corrective action will cause the market to turn.
In conclusion, I disagree with Hartwig that this is further down the road or will not be a “traditional hard market”. I just know the longer it takes to turn, the harder it will ultimately be.
Dave, I agree with much of what you say. I have been in this business for over 30 years and I have not seen anything quite like this. Carriers would love to take large rate increases, but are unable to because of the very poor economy. The hard market is easier to get through if the economy is good, but when it is bad, insureds will go another way and there always seems to be someone who will do it for less or the customer will buy reduced coverage to get to the bottom line. I have carriers who say they must take a 20% jump to clean up their book, even on loss free customers. I ask them what 100% of nothing is. If they run enough customers off, they will feel the pinch in the coming year or two.
Agent, the form any change in the market will take is dependent on too many things to accurately predict. How bad will things become for the insurers, will any or how many companies will go belly up, will companies take across the board initiatives or do it case by case, in an opportune time will new captial flush into the market? Too many unknowns. But I do know current conditions cannot exist too much longer, especially if there are a series of Cat losses or even just two or three big ones. As an underwriter I hope the company I work for gives me the opportunity to inflict less pain on insureds and their brokers who have treated me fairly. But senior managers do not always allow for such rationalization. I guess we’ll all see when it happens.
You are right Dave. We have too many unknowns which can take this market down or it could right itself. I think carriers are watching which way the political landscape will unfold just like other business is doing and make plans accordingly. I talk to a lot of marketing reps who say we have the worst nightmare in place currently and the insurance marketplace will not straighten up until the country is a friendlier place to do business. You can talk about reserves, combined ratios all you want, but in the end, it is all about the economy and what will happen there to determine everyones future.
friendly place? what are you talking about? US is ranked 5th in the world in “ease of doing business.” (no link supplied, just google it) In the insurance industry it is that states that create the difficulty with different laws, customs and regulations in 50 states and in every territory/commonwealth.
Hey Huh! Why don’t you ask a small businessman or a manufacturer, a contractor or even retail store how easy it is to do business now in this country. Our government is so oppressive with mountains of regulation, the EPA seems bent with attacking business in all parts of the country and taxes on every level are going up. On top of that, we have the possibility of Obamacare kicking in and forcing employers to buy health insurance or face fines or additional taxes. This is the European model and if you have been paying attention, Europe is imploding and the Euro is about to go away. That will have a profound effect on our economy and make it worse to do business. That will also hurt the insurance industry in these difficult times.
Your first point is spot-on, and many Carrier’s profitability in recent years is solely due to reserve take downs, which is a finite kettle from which to draw. The second point is inaccurate. The surplus of the insurance operation subsidiaries of AIG is regulated at the state level, in accordance with the law. The insurance operations did not, and could not, offer a single dollar of monetary support to the parent AIG during the 2008 crisis, because that money is legally restricted for the benefit of the policyholders. As well, the industry suffered no “huge decline” in surplus – the decline in U.S. surplus after the September 2008 crisis was only 4.2% at the end of the first quarter of 2009, which was nearly entirely unrealized losses on investment portfolios when the market was crashing. The U.S. Policyholder Surplus of AIG’s insurance subsidiaries grew modestly from $26.1 to $27.7 billion from 2008 to 2009, which clearly has no relevance or reflection to the government’s involvement with the parent AIG. On the balance of the discussion, many of the key carriers are now operating on a very light leverage ratio – their premium to PHS ratio is at or less than 1:1. This means that while they are amply capitalized to write far more premium, they are choosing not to do so. As Insurance Carriers adapt themselves to more closely mirror “financial organizations”, and implement predictive modeling to attempt to narrow loss fluctuations, they will choose to allocate their capital where the financial return is the greatest. That may be by NOT writing insurance when the rate of return is projected as less than can be made solely through investing. This balancing act, correlative between the investment market and insurance rates, will eventually find a narrow band of variance. When insurance rates improve, carriers will pursue increased premiums for better returns, until such time as their re-entry into the insurance market sways the supply/demand curve and drives the rates back down. I foresee micro-cycles in the marketplace being both inevitable and the new norm.
What scares me is your comment taht insurance carriers “adapt themselves to more closely mirror financial organizations.” Yikes. We’re all in trouble.
Dave,
Your comments are very thoughtful. Another area that I think Hartwig did not pay sufficient attention to is the Fed’s negative interest rate policy & its effect on investment income return which historically has been critical to profitability. With the rate of inflation well in excess of returns on fixed income, cash etc. the only way left is to make an Underwriting profit.
If the market was still working, & I contend it is not, the hard market should already be upon us.
Would value your thoughts.
Tell this to the California Comp market. Average increase so far is 25% for 7-1-12 renewals. I think they are sneaking up on us.
Raider, I feel sorry for you in California. You have an extremely liberal government which is bankrupt and they are not inclined to make the reforms necessary to right the ship. In Texas, we had reform of the Workers Compensation system several years ago and it has worked to stabilize the rates and put it in a profitable posture. Companies like it, want it and will cut prices to get a good account.
Very True !
The NCCI has been pussyfooting around it for several years. There is big trouble ahead for comp carriers, no doubt about it.
In Texas, at least we have our own rating plan for modifiers. I understand in other states, NCCI have imposed much higher factors for calculation of mods so it doesnt take much to have an account’s mod to go to crap because of the calculations.
Hartwig is right on all points but wrong in assuming that there still is an an insurance market, that might bring back a hard market.
As long as the giant insurance zombie also know as AIG, continues to unfairly compete against the prudent carriers, there is zero chance of a hard market. There are also other major European carriers that do business here, that are about to fail as AIG did. They are heavily exposed to failing banks & Sovereign bonds{Greece, Spain,Italy etc.}. Is anyone paying attention to what is happening there? AIG set the precedent for their future bailouts to come!
On what basis is your comment that Chartis9Formerly AIG/Soon to be AIG again) is unfairly competing against so called “prudent” carriers? I can tell you that working at Chartis and being charged with, measured by and performance standards based upon obtaining right price for risks and seeking and obtaining rate increases on current book.
If you call Travelers, Markel, ACE, XL, Catlin or Zurich “prudent” carriers, I really question how much of an industry veteran you really are.
The problem is that most brokers and underwriters are used to being order takers and givers, they know nothing of learning about what their insureds do or develop relationships with each other on a business level.
They are all about cheapest price for most coverage and let the risks and facts be damned…
That is the current industry and why I dislike it so much and long for the days when both sides could have an intelligent discussion about the risk and exposures and both sides knew what they were talking about…
Under, I can appreciate your position trying to do the right thing. I think a lot of agents, not brokers have run up against AIG/Chartis back in the soft market salad days and saw what was going on with what they would do to write a risk. Back when AIG was caught along with other carriers doing bid rigging with Marsh Mc did not sit well with a lot of people. I don’t think there are many prudent carriers out there today. They are driving us crazy with unwarranted rate increases and forcing us to shop the market to try to get something the customer will live with. This all has to do with Combined L/R, reserves, capital etc. Instead of moderating rate increases, they are wanting too much increase all at once. This is patently unfair, but it is what it is for now.
I see Chartis’s prices everyday. And getting 5-7% rate increases on renewal business under-priced by 30%, 40%, 50% doesn’t cut it. And having free reign to charge what is wanted on new business means replacing lost renewal business with even cheaper new business. Having to increase reserves by several billions in both 2009 and 2010 says a lot about past pricing and reserving practices. I guess we’ll see soon enough as old losses once again catch up with them.
Wouldn’t a hard market require underwriters to actually price risks appropriately. I’m an underwriter and what I see the rest of the market doing is just insane. It’s basically a “name your price” environment. Carriers try to push rate increases and the brokers just move it to whoever is willing to continue cutting price. It’s not even just pricing either. The coverage enhancements being thrown at some bad risks is just crazy. I can’t tell you how many pissy phone calls I’ve taken from brokers saying “wait…you want to charge an AP to increase policy limits….xyz carrier does that for free” Fine, then place your business with them and don’t come crying to me when they pull out of the market and you have to move an entire book of business…again. There’s plenty of blame to go around. For us few underwriters actually trying to price these risk adequately, there’s nothing more we can do but try to push coverage vs price. Most agents don’t want to hear it though. Renewal goes up from $40k to $50k after whacking the carrier with several claims, and they come in barking orders for a premium DECREASE!
rant/
I empathize with you Joker and also agree there is plenty of blame to go around. What we as agents have to deal with is the customer looking eyeball to eyeball. Most cannot understand why a carrier wants a 20% price increase when they have yet to pay a claim on their business. Give the rate increase to accounts who have had losses, keep the rate increase moderate on the good accounts. I can sell 5-7%, but not 20% on the better accounts.
You are right Veteran. Anyone who thinks they have this figured out is probably wrong. If Europe goes down, it will affect the US adversely. There are a lot of markets over there from Lloyds to Zurich to several reinsurers who will dictate terms to the US market. The small regional carriers out there are very vulnerable to re-insurance rate increases and must raise their rates or go out of business. I can see a round of acquisitions from the big players acquiring smaller companies and consolidating business. AIG/Chartis are bad actors and probably will be allowed to gobble up more business even though they still owe $80 Billion to the taxpayers. We will end up with a much smaller number of big players in the market. These are the guys who can grease the palms of our elected representatives to get special deals. Warren Buffet is one of the chief recipients of special favors.