One thing is for sure: Everyone agrees that the global financial crisis, a volatile investment environment and a shrinking economy that began two years ago has had an impact on every industry, the P/C industry notwithstanding. This resulted in keeping premiums down and the soft market continuing. Some see a shift beginning to take place in the insurance market in early 2010, while others are more cautiously optimistic.
William R. Berkley, chairman and chief executive of W.R. Berkley Corp., a premier Commercial Lines Property/Casualty insurance provider, predicted in the summer after the company’s second quarterly earnings were announced that inevitable price increases will occur by the end of 2009 or the beginning of 2010. “This is the first time we are seeing more increases in areas than not,” said Berkley, indicating that June rates increased 0.2 %, the first time his company as a whole has seen an increase since 2005. Then in late October, after third-quarter results for the company were announced, Berkley still maintained his view that the market would turn, stating that the shift would occur in the first half of 2010: "…Although the insurance cycle has not yet turned, for the quarter pricing on renewal business year over year is down less than one half percent and our premium volume is down less than three percent. New business from our start-ups is, in part, offsetting premium declines from our established companies. At current pricing levels with existing low interest rates, we believe the industry is operating at a net loss on an accident year basis; and a turn in the cycle is inevitable. We anticipate modest improvement in the economy and a turn in the insurance pricing environment in the first half of next year. We continue to believe that we will meet our objective of a return of 15% on equity.”
In contrast, Brian Duperreault, chief executive of Marsh & McLennan Cos., in an interview with the Wall Street Journal on November 4, doesn’t see the market hardening any time soon: "We have to face the fact that the market is soft and getting softer.” Some regions are growing, he said, such as Asia and South America, where Marsh, the company's brokerage business, has a big presence. "We will focus on that," he said.
Greg Case, chief executive of Aon Corp., sees prices beginning "to flatten out" in some spots, but he doesn't expect to see "meaningful movement" in prices before the second half of 2010.
Advisen, which provides insight into underwriting, marketing and purchasing Ccommercial insurance, produced a brief in October, “Planning for 2010: The Recession Will Keep Commercial Insurance Premiums Under Pressure,”, that basically states insurance consumers will continue to enjoy favorable pricing in 2010…hence the soft market will continue into next year. “In the aggregate, written premiums are almost certain to fall further in 2010 due to economic conditions,” the Advisen brief states, “which is more bad news for insurers and, especially, for brokers already struggling with lower commission income.” The report indicates that Commercial insurance on average continues a downward trend but not at a much reduced pace as in 2008. Property coverage renewing in the third quarter saw almost no change in average premiums compared with the same quarter in 2008. Properties in areas exposed to natural catastrophes had seen some upward pressure on premiums in recent years, but that pressure has mostly dissipated after a relatively benign 2009 hurricane season. Current rates for General Liability and Workers Compensation insurance are near their 2001 levels and are not expected to harden soon. There are, however, certain lines of businesses that have seen premium increases, such as D&O for companies in the financial sector (more than 30% on average over the past 12 months). But overall the view at Advisen based on its data is that written premiums “will almost certainly fall due to the ravages of the recession on sales and payrolls.” The recession’s impact will affect premiums based on region, sector and line of insurance, with brokers feeling the pain more so than the carriers. The hard market will most likely occur, according to Advisen, for Ccommercial lines by the end of 2010, early 2011.
ISO and the Property Casualty Insurers Association of America released first-half 2009 results, indicating the beginning of a rebound in profitability for P/C carriers. Results show that the industry’s annualized statutory rate of return on average surplus of positive 2.5% percent during the first half of 2009 was down from 5.5% percent for the first half of 2008, but up from the negative -1.2% percent during the first quarter of 2009 and positive 0.5% percent for all of 2008. Dr. Robert P. Hartwig, president of the Insurance Information Institute (I.I.I.), commented on in his comments about the results, statinges that the industry’s profitability returned back into positive territory primarily because ofy a 60% reduction in realized capital losses, which shrank to $3.2 billion in the second quarter from $8.0 billion in the first, reflecting improved stock and bond market conditions. Secondary factors included improved underwriting conditions, with the second quarter combined ratio falling to 99.5 from 102.2 in the first quarter, leaving the first half combined ratio at 100.9. In another sign of recovery, capacity in the industry (as measured by policyholders’ surplus) rebounded for the first time in two years. Policyholders’ surplus increased by $25.9 billion or 5.9 % to $463.0 billion during the second quarter from $437.1 billion at the end of the first quarter. Dr. Hartwig observes that this reversal is significant given that P/C insurance industry capacity had plunged by an alarming $84.7 billion or 16.2% percent over the previous five quarters from the pre-crisis peak of $521.8 billion at the end of the second quarter of 2007. “The return to profitability and rising capacity during the first half are primarily attributed to improved investment market performance. At the same time, persistent soft market conditions and a deep recession have severely impacted the P/C insurance industry’s growth. While insurers remain cautious about the economy and financial market conditions, there is guarded optimism that both will continue to improve as the industry moves toward 2010,” writes Dr. Hartwig.
The bottom line is that we as an industry are in recovery but is it enough for the market to harden? Back in June when we at ProgramBusiness spoke with Dr. Hartwig, he stated: “There have been some isolated areas of a hardening market such as with Coastal Property and Professional Liability coverages, but there isn’t a widespread market hardening. From a historical standard not enough capital has been depleted from the system, therefore until this occurs or something comes along to radically alter the perception of risks, we are unlikely to experience a sharp hard market. Commercial lines pricing is less negative than a year ago, but on average it is still in negative territory. We cannot indicate timing for a hard market but certainly if there is significant erosion in capital or we have a natural catastrophe or an unprecedented event, the market could turn.”
How do we move forward in 2010?
As an independent agent, how do we continue to weather a soft market that may or may not harden in 2010? A recent IIABA Best Practice Study, states that all P/C agencies need approximately 15% in new business to match the industry average just to stay even. For example, an agency doing $1.25 million will need to generate $187,500 in new business to match the industry averages. At an average of $3,000 commission per new account, that translates into needing 62 new accounts (at $4,000 per new account, you will need 47 new accounts). Agencies with revenues of $1.25 million need each of their producers to sell 20 new accounts per year. All producers regardless of agency size must produce 18 or more new accounts to match the industry average.
What does this all translate to? Developing a plan that capitalizes on your expertise in target markets, adding new niche programs to your arsenal, and converting your agency to one that is a sales organization and that is based on relationship selling. In speaking with Al Diamond, president of Agency Consulting Group, a consulting firm dedicated to the needs of independent agents throughout the U.S. for more than two decades, about economic conditions and the soft market, he emphasizes the need for agencies to start selling insurance differently. “Agents need to market, which was previously not done to obtain additional customers. There are customers available to agencies, everyone is suffering from the same problems, and everyone wants to control costs. If you can see these potential customers, you can help them with their insurance needs. It’s a matter of getting into seeing more customers and this requires marketing efforts." Al also recommends that to survive and experience success, agencies need to evolve from quoting price in your operation to adapting a consultative model. This involves working with fewer prospects and doing so more intensively, which will result in writing a higher percentage of those prospects.
Robert Sutter, president of Keystone Legacy Development, a division of Keystone Insurers Group, with more than 15 years of experience in producer training under his belt, underscores the need for agencies to become more business solution-oriented rather than product-oriented. Robert explains that it’s the role of expert that agency producers need to adopt. It’s about developing a true sales culture within the organization that focusing on solutions and not price.
Agreeing on whether the market is heading for a turn in which rates experience an upswing seems quite challenging considering all the factors at play. One thing is certain, though, the need to work harder and smarter to generate even more business is key to maintaining growth and profitability.