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

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.

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.

Has the hard market peaked?
According to a Jan. 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 P/C 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 fall off 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
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.

Today we don’t need to fear a soft market as much as we have in the past because we now have a weapon that is smarter, more advanced, and proven—technology. Technology is more powerful today than it was before the emergence of the last soft market and it can have greater impact on business performance.

In an earlier 2002 report, “Insurance—Property and Casualty,” Morgan Stanley states that the issue of cycle management will grow in importance. “Stability of earnings enhances credit quality and those companies that use this market upturn to instill operating discipline and the systems and procedures necessary to react to the next downturn will be those most likely to see ratings improvements (or avoid downgrades).”

In other words, using capital from rising premiums in a hard market to fund and deploy technology to improve operating discipline and better manage the next downturn will help avoid ratings downgrades and may even contribute to ratings improvements.

This analysis highlights what insurers can do today to gain a competitive advantage in the next soft market. It states that data quality, integrity, and the ability to use those to a competitive advantage may separate some companies and that comprehensive, quality data enables insurers to accurately capture risk concentration and aggregation. The study further states that “technology will continue to improve insurers’ ability to quantify and manage risks.”

Improving underwriting and pricing control
When the cycle turns—when you cannot raise premiums to boost profit and when projected profits can only be achieved through a lower cost structure—will your company have the competitive advantage to increase—or even maintain—market share, to achieve higher stock prices and to produce superior returns to shareholders? In the next soft market, a carrier using technology strategically will have a lower cost structure and, therefore, be more profitable than competitors and should be able to meet these goals.

With today’s advanced technology—that can be deployed in as little as three to six months by outsourcing application development—carriers can improve underwriting and pricing control, thus producing better underwriting performance today and ensure that carriers are better positioned for when the soft market returns.

Geoff Smith is executive vice president and COO of ePolicy Solutions Inc. (www.epolicysolutions.com). Previously, he spent 30 years at The Hartford.

Geoff Smith is executive vice president and COO of ePolicy Solutions Inc. (www.epolicysolutions.com). Previously, he spent 30 years at The Hartford.

Topics Tech Market Property Casualty