A report released at the recent Risk & Insurance Management Society (RIMS) conference in Chicago found that after only two years of double-digit percentage premium increases, the property market has already begun to soften. The question then posed at the conference was whether the casualty side will follow soon, if at all.
The general consensus seems to be no. As Aon managing director Gary Marchitello put it, new capacity has entered the property market—mostly coming from Bermuda-domiciled companies—increasing supply and effectively halting price escalation. Rates went up by 70 percent after Sept. 11, Marchitello said, while limits decreased by half and deductibles doubled.
“Insurers made a lot of money in 2002,” Marchitello said. In addition to higher premiums, fortune smiled on carriers and made last year catastrophe-free, he added. Also, terrorism cover is often being priced separately in compliance with the Terrorism Risk Insurance Act (TRIA), so that risk has been removed from the pricing of property cover.
“Terrorism has historically been part of the property policy,” Marchitello said. “There was a psychological overlay in the marketplace and TRIA helped removed that uncertainty. It’s an imperfect solution, but it did help.
“Underwriters don’t like to see this kind of news in the paper,” Marchitello said, “but they realize it’s time to have an adult discussion about this. … It’s a much more rational marketplace. Information is key. The more you can differentiate your different clients’ risks, the better deal you’re going to get.”
Marchitello did warn that any major catastrophes could set back any softening. A single $10 billion loss would be enough, he said.
What about casualty?
Marchitello said Aon has not conducted any similar surveys for other lines of business in the casualty area, but he noted that rates for directors and officers (D&O) liability coverage have risen precipitously in light of the accounting and financial scandals of 2001 and 2002, as well as from the passage of the Sarbanes-Oxley legislation, even though its full impact is still unclear.
A survey conducted by RIMS showed D&O premiums increased 83 percent on average in the first quarter of 2003. RIMS also reported that excess casualty insurance premiums rose only 19 percent during the same period, compared to a 118 percent increase in 2002. While that’s an improvement, it’s a far cry from the 20 percent declines some carriers have offered on property insurance.
Paul F. Sherbine, a credit analyst for Marsh Information Group said he was “shocked to read about property rates in the Wall Street Journal. This is still a very sick industry. … Carriers cannot follow up a decade-plus soft market with only a couple years of discipline.”
If the property trend extends into other areas, carriers could run into serious troubles with the ratings agencies, more selective risk managers and brokers and, ultimately, serious questions about solvency.
Yet at a market update session, Donald McCue of Insurance Services Office said there are early signs that rate increases are slowing. He predicted that the hard market will last through at least the end of this year, with ISO forecasting that across all lines rates will increase 12.5 percent, breaking down as follows: Personal lines, 10.1 percent; commercial lines, 15 percent; reinsurance, 17.5 percent.
McCue said the industry’s return on equity could approximate the 1990s average of 8.1 percent as early as 2004, clearing the way for a return to the soft market, unless there are major adverse events. However, he advised insurance consumers to “pay as much attention to quality as you do to price.”
New from Bermuda
One example of the new Bermudian capital being infused into the hardened P/C marketplace is the Arch Insurance Group, which introduced itself at RIMS.
A reinsurer known as Risk Capital Group until May 5, 2000, Arch is now also in the primary insurance business, with $1.4 billion in equity capital which Arch Marine and Energy President Thomas G. Kaiser described as “fresh” and “clean.”
“Our book of business isn’t burdened by legacy issues,” he said, “so we can stay focused on the future. We have fresh capital. We’re not spending time trying to fix last year’s problems.”
Arch is licensed in 49 states and is awaiting admission in New Hampshire. Appointments are available directly, though most of the company’s distribution is channeled through MGAs and retail and wholesale brokers. The company recently purchased Kemper Surety Co., whose main office staffed by 14 underwriters is in Philadelphia.
The company offers construction and surety, D&O, medical liability, primary and excess casualty, professional liability, marine and energy, and program business and alternative risk cover.
On the D&O question, executive assurance vice president Thomas Gamble said Arch is “clearly looking to expand.”
Ignoring terror risks?
In a keynote luncheon address, Marsh Crisis Consulting CEO L. Paul Bremer, told attendees that too many companies were being optimistic about the terror risks they faced. He cited a Council on Competitive-ness survey showing 90 percent of CEOs did not believe their companies faced any terror threat, in spite of the fact that 8 out of 10 terror targets are American businesses (usually overseas). However, 81 percent of CEOs admit their companies are vulnerable to a major business interruption.
Meanwhile, an Allianz Global Risks survey showed 84 percent of risk managers do not believe their terror exposures have increased due to the war with Iraq.
Bremer said companies should avoid the complacency that high levels of the U.S. government had fallen sway to before the attacks of Sept. 11. The government was reactive, but companies should be proactive, he said.
“Crisis readiness is no longer an option,” Bremer said, “but a mark of good governance.” Calling for companies to put in place crisis readiness plans including business interruption coverage, Bremer said, “Even if it’s the best readiness plan out there —meaning [Marsh] wrote it—what use is it if you never test it out?”
With the relatively low take-up of TRIA coverage, however, it appears many businesses have taken a different view of the matter. A risk manager for a long-haul trucking company based in Hillside, Ill., commented that the talk of terror risks did not apply to her firm.
“Who’s going to attack Hillside?” she said.
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