If you were an insurance buyer in 2007, you enjoyed the benefits of a rapidly softening market for all but catastrophe-prone exposures, with no turnaround in sight, given the high profits and deep pockets reported by the industry nationwide.
As a price-cutting mentality reverberates throughout the property-casualty business, the widening and deepening soft market for almost all lines makes this the top news development of the year.
If you own a home or business along the Gulf Coast (where the risk of a massive hurricane scares away carriers) or in California (where the threat of earthquakes and wildfires haunts property insurers), you probably cannot count on premiums to plummet—but just about everywhere else, policyholders are in the driver’s seat.
As a result, agents and brokers must scramble to defend accounts against poachers trying to lure buyers with lower prices, higher limits and broader coverage, while pressing for new business to make up for falling commissions on renewals.
At the same time, underwriters are under the gun to maintain market share without following their fellow lemmings off the cliff, as was the norm in soft markets past.
The latest “barometer” survey by MarketScout showed prices in November down an average of 15 percent, with deeper cuts reported for general liability (18 percent), directors and officers coverage (17 percent). and employment practices liability (16 percent).
As a result, the industry won’t break double-digits again for quite some time when it comes to return on equity, according to Robert P. Hartwig, president of the Insurance Information Institute.
Meanwhile, insurers cannot count on investment returns to cushion falling premium volume, as interest rate cuts and a volatile stock market make gains on Wall Street as unreliable as on Main Street.
On a positive note, the industry is expected to remain profitable at least through next year. Mr. Hartwig believes the combined ratio will be about 93.5 for 2007 and stay below the magic 100 mark next year—which would make 2008 the third-straight year that insurers as a whole operated in the black.
How long the industry can sustain profitability is another question, with a turn in the market perhaps years away.
“Unless there is a gargantuan catastrophe or series of catastrophes, the soft market is going to continue to go on its path for quite awhile to come, until the losses start to eat into surplus,” said David Bradford, author of an Advisen Ltd. report—“The Soft Market: How Low Can It Go?”