Insurance Pricing Cycle Update
Issue #58
June, 09, 2008
What goes around comes around, and this has certainly been true with property and casualty insurance rates. After thirty seven years observing these cycles, I can safely say that wherever we are today, it will change sometime in the future, it is just a matter of when.
Soft Markets - Hard Markets
The insurance industry pricing cycle alternates between periods of soft and hard market conditions. In a hard market, coverage is harder to place and premiums grow. A soft market indicates premiums are stable or falling and coverages may be more readily available.
A variety of factors affect the insurance market cycle, including economic downturns, catastrophe events, insurers' claims reserve dollars, and supply and demand (supply is tied to the amount of policyholder surplus in the industry and demand is the appetite of the insurance-buying community to transfer risks).
Beginning in March of 2005, the cycle began to turn towards a soft market conditon. New players have jumped into the game resulting in increased competition. Rates have either stabilized or, in some lines like workers' compensation, been reduced significantly. While I don't have a crystal ball, there are currently some signs I have observed in previous cycles that feel like change is taking place. Here are some observations:
Catastrophes
• The first quarter of 2008 was the worst in over a decade for insured losses as a result of natural catastrophes.
• Hurricane season is underway, and if the tornadoes in the Midwest are any indication, it could be a tough year.
Workers Compensation
• The California Workers Compensation Insurance Rating Bureau (WCIRB) has not recommended a rate change for July 1, 2008.
• This is the first time since 2001 that there has not been a mid-year rate change.
Mergers & Acquisitions
• Liberty Mutual is acquiring Safeco after having purchased Ohio Casualty last year.
• More activity is forecast with interest from foreign insurers making U.S. acquisitions, thereby reducing the number of major multi-line insurance companies.
Profits
• The profit levels of many insurance companies are being reported to be down this year as compared to last year.
• Standard & Poor's has kept its stable outlooks on the property/casualty, and reinsurance sectors--reflecting its opinion that upgrades and downgrades will be almost equal in the next six months. However, S&P said it believes the tables could be turning, especially given weakening economic trends and industry-specific factors that depress earnings.
Regulatory Actions
• Last week, New York self-insured trust administrator Compensation Risk Managers LLC (CRM), who covered workers’ compensation claims, agreed to surrender its license. The action settles charges by the New York state Workers' Compensation Board (WCB) that CRM failed to pay injured workers in a timely fashion, did not file proper forms with the WCB, engaged in "improper delay tactics," set inadequate reserves on claims, and submitted false information to its clients and the WCB. CRM administers self-insured groups in other states as well, including California.
Buyer Beware
While the soft market is advantageous for the buyer, it is important to keep the longer term in mind. Insurance companies that under price the most tend to be the first ones to pull out of the market, or worse yet experience insolvency. And those low price leaders that survive suffer stability issues (staffing, financial, etc.) as they must make significant rate corrections.
I believe that now is the time to consider insuring your business with solid carriers who may not have had the lowest rates, yet have demonstrated their ability to remain stable in all market conditions.
Kempkey Insurance Services goes beyond insurance by designing and implementing risk management programs for growth oriented businesses. We help our clients maximize the value of their insurance dollars and minimize their potential for unwanted surprises. Ed Kempkey can be contacted at (888) 536-7539 extension 2188, or at ed@kempkey.com.