After Stormy 2008, P/C Industry Facing Uncertainty in New Year

By | January 5, 2009

Ask agents and executives in the insurance industry about the new year and they’ll say they expect that the market will harden, at least slightly. In fact, 73 percent of agents predict prices will firm, according to a new Insurance Journal poll.

Beyond that, it’s a guessing game as to what’s ahead. People have been left reeling by 2008, which turned out to be a year like no other. It was a year of storms, which included the continued soft market, the
meltdown of the world’s largest insurer AIG, the housing and credit crises, the Wall Street bailout, and natural catastrophes that generated $22 billion in insured damage. With the effects of 2008 spilling over into the New Year, property/casualty industry partners are a bit unsure about what is in store for 2009 and about their predictive abilities.

“I think that people are saying the market will harden up a little bit, but everything is in such turmoil right now with the financial markets that the crystal ball is a little cloudy at this point,” said Len Brevik, executive vice president of the Professional Insurance Agents.

Bob Rusbuldt, chief executive of the Independent Insurance Agents and Brokers of America, predicted 2009 will bring some hardening in the insurance marketplace, and merger and acquisition activity will continue but at a slower growth rate than in the past. He remains “very bullish” about independent agents, despite the doom and gloom outlook for the global economy.

“Independent agents will fare better vis-├ávis other entities in the financial services industry,” Rusbuldt said. “I think independent agents are going to shine in this economy because of the value they add, the professional advice and counsel they give to both businesses and personal lines consumers … things that become much more important in this type of economy we are living in.”

Most independent agents tend to agree with those assessments. According to an exclusive Insurance Journal survey on “Wishes & Predictions for 2009,” 73 percent of 369 independent agents and brokers surveyed believe that the P/C insurance market will harden slightly in 2009. Sixteen percent said it will stay just the same, and only 12 percent said further softening is in store.

Wishes for New Year
When it comes to independent agents’ wishes for the new year, virtually all respondents said they hope for a harder and more stable market, not surprising given the premium declines in the past couple of years. At mid-year 2008, written premiums had declined for five successive quarters, which is unprecedented, according to ISO and the Property Casualty Insurers Association of America (PCI).

Prior to second-quarter 2007, written premiums declined in just two quarters — fourth quarter 1991 and third-quarter 2005. The decline in third-quarter 2005 resulted from a special transaction in which one insurer ceded $6 billion in premiums to its foreign parent, but the declines since second quarter 2007 were a result of increasingly intense competition in many insurance markets, according to the ISO/PCI report.

John Wood, president of the National Association of Surplus Lines Offices, said rate declines cannot continue at their current pace. “Premiums cannot continue to fall at the current pace that they are falling. Look what we’ve had the last years: two major hurricanes, fires on the west coast, a situation where the global economy is in disorder, and then the standard markets have increased loss ratios.”

David Sampson, PCI president and CEO, noted that even if rates do firm in 2009, a much larger concern for the P/C industry will be the reduced amount of risk available to insure in a continuing economic crisis. “Although rates may firm, the overall exposure of companies is a broader concern,” he said. “I think the most important thing that can be done for the property/casualty industry” is to encourage Congress and the administration to pursue policies that will help the nation back on the road to recovery.”

Rough Ride But Still Optimistic
Another year of heated competition made 2008 a rough ride for many insurance agents and brokers. One respondent to IJ’s survey wrote, “The soft market in commercial lines has been devastating with competition on many accounts and loss of revenue on most accounts.”

Another agent wrote that the most challenging part of 2008 was “writing twice as many policies to keep the same amount of premium on the books.”

The softening market mixed in with a worsening economy led to other challenges for agents in 2008.

As one agents wrote, the big challenges were the “soft market, reduced payrolls and receipts of insureds, and reduced supplemental income due to increasing loss ratios.”

Another agent described 2008 as a year marked by “very large rate reductions, accompanied by business closures and no new businesses being started.”

With reduced premiums come reduced commissions, and agents are concerned about some carriers’ unwillingness to raise commissions even after profit sharing, such as contingent commissions, had been eliminated or decreased.

“Carriers were quick to decrease commissions during the rise of premiums, but there’s absolutely no talk about increasing commissions now and incentive or profit sharing is still controversial,” one agent wrote.

Despite the economic turmoil and lost revenues earned by independent agencies in 2008, most respondents to Insurance Journal’s survey said they feel optimistic that their agency will fare better in 2009.

Some 42 percent reported that they were “somewhat confident” their agency would do better in 2009 than it did in 2008, while 27 percent said they were “very confident” the agency would fare better next year. Even so, another 27 percent revealed that they were “not very confident” that their independent agency would do better in 2009.

Most agents agreed the most pressing challenge of 2009 will be the deteriorating economy.

“Due to the economic problems facing our country, it will be harder to place business,” one agent wrote. “Many businesses will go out of business; therefore the market share will dwindle, making revenues decrease. Consumers will make pricing their No. 1 priority because of the economy, where in the past service played an important role for agents …”

“Maintaining renewals and finding new accounts” will present the toughest challenges in 2009, another agent wrote. “With the economy in a recession, all business accounts are holding tight and shopping.”

Another agent said the biggest challenge in 2009 will be “clients panicking due to their own financial issues and making poor insurance decisions based solely on price.”

Agents also noted that client collection issues and return premium audits as a concern. As one agent wrote, 2009 will be spent just “trying to keep the clients I have.”

Regulatory and Legislative Wishes
For industry trade associations, 2009 will be a year of new beginnings on Capitol Hill as a new Democratic Congress and a new Democratic administration take the helm.

To get things done on Capitol Hill, PIA’s Brevik wishes for an insurance industry where all stakeholders concern themselves more with what will benefit the entire industry rather than their own concerns.

The industry is somewhat fractured, Brevik said, and because of that it’s sometimes tough to get legislation through Congress. “By the industry, I mean not just agents, but the insurance companies as well.”

The new Congress and administration will provide the industry with opportunities such as natural disaster legislation, he added. “As this natural disaster legislation comes through, we should be able to sit down and say, ‘What can we agree to as an industry, to help move this process forward,’ and not have it mired down in politics and problems,” Brevik said.

PCI’s Sampson also wishes for a more unified industry in 2009.

“My one dominate wish would be that all segments of our industry work together in ways that we have not done before to help incoming policymakers and staff in the new Congress and new administration understand the vital role of our industry, the strength of our products and policies, the strict solvency regulations already in place, and the contributions we make to the success of the American economy.”

A united insurance industry maybe more important in 2009 as regulation of insurance and all financial services comes under more scrutiny.

“I think we’ll get some level of federal involvement,” predicted Euclid Black, president of the American Association of Managing General Agencies. “I think there’s some great points to be made on why there should be state regulation, but I don’t see how we are going to keep some element of federal out of the mix.”

Sampson hopes that whatever happens on Capitol Hill in 2009, that the industry “will emerge on the other end of the financial services regulatory reform debate with a structure that addresses legitimate problems,” but “will stop short of adding a layer of duplicative and punitive regulation.”

NAPSLO’s Wood said he wishes for a better understanding of the important role surplus lines providers play in the market. “One of my wishes would be that legislators and regulators will understand the job we do and the part that we play in the insurance industry.” He added, “everything is not broken … I think we do a good job in our industry of delivering our products.”

As for the Big “I’s” Rusbuldt, he wishes for what every association executive wants for its members: “That we win all of our legislative issues,” he joked.

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