Last week we interviewed Robert P. Hartwig, CPCU, President of the Insurance Information Institute (I.I.I.), to get his pulse and read on the market and where it’s heading. Dr. Hartwig sees the soft market beginning to ease in 2011 and rates likely “firming” by 2012-2014, but not significant enough to trigger a traditional hard market. Additionally, in discussing Workers Compensation, he explained that a weak economy has significantly hit this area and made it increasingly challenging.
The interview orginally appeared in this week's edition of our on-line newsletter, Insurance Unplugged. We've reproduced it here, just in case you missed it:
Annie George (AG): How has the economy impacted, exacerbated the soft market? Are there any factors under which you would anticipate significant rate increases?
Robert Hartwig (RH): “There is no question that the sluggish economy has exacerbated the soft market and continues to do so today, with companies downsizing and going out of business, reducing the amount of insurance premium purchased. What we have is a situation where there’s record capacity in the commercial insurance industry chasing greatly depressed exposure levels, which in part prolongs the soft market.
“What’s more, there is no catalyst today that suggests that we will experience a robust hard market any time in the foreseeable future. There are, however, a number of factors that would indicate that a firming market is likely to occur in the next two to four years. This includes a recovery in the more general economy where some of the capital in the industry is absorbed through an increase in demand for commercial insurance. Another factor is that for many insurers current calendar year results are improved by prior year reserve releases. It’s inevitable that at some point insurers will exhaust these reserves and there will be more pressure to improve current calendar results through pricing. Additionally, 70% of insurer investment is in low-interest bonds, therefore companies will be offsetting less of their underwriting losses with investment income, which will also put pressure on insurance pricing. And, a likely deterioration of the tort environment, which is already occurring, will become more pronounced over the next few years, also affecting the market.
“All of these factors taken together are likely to produce firming market conditions in the 2012-2014 timeframe.”
In discussing the state of the reinsurance market, Dr. Hartwig underscores the stability in this space, citing that although there were large-scale losses this year on a global level (i.e., the Chilean earthquake, Deepwater Horizon, and major storms in Europe), there is ample capacity in the reinsurance world. “Reinsurance pricing remains stable,” said Dr. Hartwig. “There are pockets where prices are rising but in many areas the cost of reinsurance is falling due to capacity and below-average losses in some cases. The market remains competitive and very well capitalized.”
AG: Some economists say that inflation is inevitable given the continuous devaluing of our currency. Would that inflation extend to insurance premiums and to what extent?
RH: “A preoccupation right now with inflation is rather curious because the Federal Reserve has stated that it is deflation, not inflation, that is its primary concern, which is why it’s expected to engage in a second round of quantitative easing beginning this month. The Federal Reserve hopes to increase inflation from its current level of about one percent to two percent or so. Only after this point will it consider reversing course and draining some of the liquidity from the system that it has added.”
Dr. Hartwig also explained that although significant inflation is not a factor in the overall economy today, there are certain areas important to insurers where inflation with a rate above that in the overall economy can be a factor. These areas include healthcare – medical services whether they’re provided through Workers Comp or Auto claims, for example – as well as the costs associated with litigation. Even items such as the cost of repairing vehicles continue to rise above the general rate of inflation. “Inflation as it’s experienced by the Property/Casualty industry is certainly different from how it’s experienced by the general economy, but still there is no reason to expect an outbreak of inflation as we move into 2011,” said Dr. Hartwig.
AG: What has been the tangible impact of unemployment on Workers Compensation?
RH: Not surprisingly unemployment and the loss of associated payroll have had a significant impact on the premium base for Workers Compensation, which is in effect payroll. The available payroll base for insurers has made it almost impossible for them to grow over the past several years. I have estimated that more than 3.5% of all payroll exposure has been destroyed by the recession and economic downturn. This is more than any recession save one in the post-WWII era. “Coupled with the soft market in Workers Compensation, approximately 25% of all premiums written have evaporated over the past 4-5 years. This is extraordinary, with nothing like this occurring in recent history. However, with private-sector hiring seeing a bit of a rise, it’s very likely that Workers Compensation payroll is at the very earliest stages of recovery. If youwere to adjust for ongoing changes in premium rates, we will probably see Workers Compensation rates pick up as we move into 2011.”
AG: How has the Deepwater Horizon explosion in the Gulf affected the Energy market?
RH: “In the wake of the Deepwater Horizon oil spill -- the largest spill in history -- it’s not surprising that the cost of Energy cover would be rising. The disaster has highlighted the extraordinary and unique risks associated with drilling. There is also a lot of regulatory uncertainty associated with the type of liability that will be imposed on operators moving forward. This uncertainty often leads to higher prices in order to compensate for the potential additional associated risk. This being said, insurers are working hard to bring additional capacity to the market.”
Furthermore, Dr. Hartwig underscores the commitment of insurers to serve the Energy market despite the fact that there were approximately $3.5 billion in insured losses. “There are really no insurance impediments in this marketplace; the impediments that have been erected have been imposed generally by the Administration with its recently lifted moratorium as well as a slowdown of drilling approvals of in the Gulf. But Energy insurance is available and affordable in all parts of the world,” said Dr. Hartwig.
AG: What impact will the regulatory reforms have on the Property/Industry industry?
RH: “The insurance industry managed to escape the more Draconian measures considered by Congress as part of the overall financial services reform, which was signed into law by the President this summer. We were not left totally unscathed, but it was recognized that insurers are distinct from banks and that insurers were not responsible for causing the financial crisis. Furthermore, it was also recognized that insurers should not generally be viewed as systematically important organizations. Insurers are important but not in a systematic sense in which their activities would destabilize the economy should one or more get into trouble. This being said, insurers are large enough and important enough, and could potentially be taken over by a federal agency under the new reforms in the event that they were deemed to be systematically important and on the verge of failing at some point in the future. It’s only theoretical, nevertheless non-bank institutions such as insurers would fall under the prevue of federal authority in the event of a systematically important firm destabilizing.”
Dr. Hartwig also explained that the creation of the Federal Insurance Office is quite different and new. “Never before has a governing agency or department been responsible for the Property/Casualty or Life industries,” said Dr. Hartwig. This unit will be created within the Treasury with a director appointed, and will serve in an informational capacity to the Treasury and government in general, providing information about the industry, about which firms might be systematically important, as well as being responsible for the federal terrorism program [TRIA] and providing information on international trade agreements. But at this point the Federal Insurance Office will not have regulatory power. Authority over insurers remains with the individual state insurance departments.”
Dr. Hartwig emphasized the strength of the industry, which is reflected by its solid capitalization and strong ratings by independent rating agencies. He also underscored that the market remains good for consumers and one in which they can rely upon. “As the industry moves forward in 2011, it will continue to experience an improvement in financial results assuming normal catastrophes and losses, and that there isn’t another stock market crash. Under this scenario, insurance buyers can expect intense competition for business and will be able to confidently rely on the industry to pay for major catastrophe losses.”
About Dr. Hartwig and the I.I.I.
Dr. Hartwig joined I.I.I. in 1998 and as a chief economist has focused his work on improving the understanding of key insurance issues across all industry stakeholders including media, consumers, insurers, producers, regulators, legislators and investors. You can follow him on Twitter.
For 50 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.