Current Market Not Yet a ‘Classic’ Hard Market: P/C Executives

By | April 23, 2012

The current property/casualty market is not a “classic” hard market, yet anyway.

While prices are clearly rising in certain lines including property and workers’ compensation, other conditions of a traditional hard market are not in place, according to property/casualty brokerage and insurer executives.

“There are multiple markets out there,” Eric Anderson, CEO, Aon Risk Solutions, Americas, told an audience at the Risk and Insurance Management Society (RIMS) meeting last week in Philadelphia.

A market is defined by more than just pricing, according to the Aon executive. The dynamics include terms and conditions, adequacy of limits, individual carrier appetites, geography and other factors in addition to pricing.

Anderson said Aon’s data is “still tracking a soft market” in several areas. Terms and conditions “are still very competitive” and customers appear able to get whatever limits they need.

“I don’t see customers struggling to get what they need,” he said.

As for pricing, this has not yet attained classic hard market status either. “If you have to ask [if there is a hard market], the answer is ‘no,'” he said.

David J. Bidmead, CEO, Marsh, agreed, characterizing today’s market as one in “active transition” but not yet a classic hard market.

“We are in this period where we are moving from one market to then next,” Bidmead said.

“Increases are happening especially in property and workers’ compensation but so are reductions in other lines and that reality illustrates this is not a classic hard market,” he told the risk managers.

This market is “considerably different” from previous cycles, according to J. Patrick Gallagher, chairman, president, CEO, Arthur J. Gallagher & Co. Whereas previous cycles were “driven by significantly reduced cash flows and fear about the balance sheet…this one is being driven by the income statement and lack of return on investment,” the brokerage leader said.

“This cycle now to me is many cycles,” he said. He likened it to the situation in 1992 after Hurricane Andrew when the property market hardened but the rest of the market did not.

“Underwriters have information on where they are making money and where they are not. They know exactly what their returns are on their portfolio and they’re not going to just write cover to lose money. I don’t find that to be unhealthy,” Gallagher said.

Peter Eastwood, president, CEO, Chartis, Americas, said he agrees it is a “market in transition” with property price increases “leading the charge” along with movement in workers’ compensation and some excess casualty.

He called the move toward higher prices “appropriate and necessary” in light of record catastrophes in 2011 and a long history of carriers not earning their cost of capital. He said the industry has to get to better pricing to earn its cost of capital.

Chartis itself ended 2011 with an overall 4.5 percent increase across all of its U.S. business.

John Lupica, chairman, ACE USA, termed today’s market “rational and stable” while also agreeing it is not yet a classic hard market.

He seconded the analysis that it is an income statement driven market. “A real hard market is a period of excess returns over cost of capital and we are not there for most companies,” Lupica said.

While it may not be a classic hard market with conditions and prices hardening everywhere, one thing is certain.

“Prices have stopped falling worldwide for sure,” said Shivan Subramaniam, chairman, CEO, of commercial property insurer FM Global.

He said there is good reason that property is leading the way in pricing, citing the 2011 natural catastrophes. More gradual change is acceptable in other lines.

“We don’t want anything dramatic happening. We want a rational pricing situation with capacity. All of us are rooting for a gradual process to get to decent returns,” Subramaniam said.

Risk managers asked if small and middle market businesses are dealing with the same insurance market conditions as large Fortune 100 corporations.

For the most part, the executives said they expect mostly similar conditions.

Marsh’s Bidmead said that middle market businesses have been hurt more by the recession, are more sensitive to price, and are more likely to shop around than bigger accounts. “These clients are really challenging their relationships,” he said.

Chartis’ Eastwood said that generally the small business segment sees less movement—it does not experience either the hardest of the hard market or the softest of the soft market. He said some regional carriers are adding to the supply available to these segments that he agreed are more likely to shop around.

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