Insurance Pricing Cycle Due for a Change, Berkley CEO Says

It’s time for a change in the property/casualty insurance pricing cycle, says William R. Berkley, founder, chairman and CEO of the W.R. Berkley Corp., and he’s “optimistic” that the cycle will turn sooner rather than later.

Speaking at NAPSLO’s annual convention in Atlanta, Berkley noted that P/C insurance prices peaked in 2006 and have been trending downward since then. But the cycle is now at the point at which historically a change would be expected, he said.

The industry experienced a combined ratio of around 86 in 2006, Berkley explained. “In the last four years, commercial lines pricing has deteriorated by a little more than 15 percent on average,” he said. “In the excess and surplus lines space, prices are down more like 30 percent.”

The current, real accident year combined ratio “is somewhere between 110 and 115,” he said, adding that he believes the industry as a whole is running at an operating loss.

Low interest rates are dragging investment results down, “and you have bad underwriting results. So operating income is being hurt now, which is something we haven’t seen in a while,” Berkley said.

“W.R. Berkley Corporation has historically had an underwriting result of 8 to 10 points better than the industry average,” Berkley said. “In the most recent year our underwriting performance suddenly looks equal to or worse than the industry average. So either our underwriters have gotten quite stupid relative to the rest of the industry or much of the industry is reporting overly optimistic results. We believe the latter, not the former.”

Such conditions can’t continue, Berkley surmised. “Companies cannot continue to write business knowingly at an operating loss,” he said. “We have confidence that the pricing cycle is currently in the process of correcting itself.” He added that a correction is already ocurring in some lines of business.

Insurance pricing cycles tend to be similar but they also maintain their own characteristics, Berkley told Insurance Journal.

“The cycle is always the same but it’s always different,” he said. For instance, in 2000, “people were shorting loss reserves. Results were much worse, reserves were short. A couple of companies, Reliance and Frontier went out of business.”

After the events of Sept. 11, 2001, the market went from hardening to very hard. “That was different than in ’85 and ’86 where the market got quite hard all of the sudden. It had been supported by reinsurers and reinsurers suddenly got very tough,” Berkley said.

Hurricane Andrew in 1992 affected the cycle in its own way, as well. “When Andrew hit, the market stopped softening for a couple of years, and that tended to make the downturn worse. … People deceived themselves into thinking that things were better when they really weren’t,” Berkley said.

Before that, in the “’70s everything was soft all at once. And I might add in the ’70s you had stagflation which impacted interest rates and underwriting profitability. … So I think it’s always a little different,” he said.