Recently, with the various cat losses experienced so far in 2011 and talk of firming prices to come, we turned to a number of our Storefronts to discuss the state of program business today. We wanted to speak with those on the front line about whether they’re seeing rate increases, and the effect a hardening market might have on the program business space.
In the last soft-to-hard cycle change about ten years ago, we saw carriers retracting from program business with program administrators left searching for new markets. In speaking with a number of Storefronts, they don’t see this happening again for a number of reasons, including the tremendous amount of capacity that exists today, increased underwriting expertise, and implementation of technology advancements.
We spoke with Geof McKernan, CEO of NSM Insurance Group; Rich Suter, Assistant VP, Program Business Development, Captive & Specialty Programs, The Hartford; Michael S. Oliver, CPCU, Senior VP, 5 Star Specialty Programs, a division of Crump Insurance Services, Inc.; David Hampson, President/CEO, Willis Programs; and Wayne Carter, CPCU, ARM, Executive VP, Crump Professional Programs, a division of Crump Insurance Services.
In discussing the market, our Storefronts are generally beginning to see stabilization of rates and some upward movement depending on the programs they write. “As of right now, the soft market is not over,” said NSM’s McKernan. “We’re seeing flat rates and, depending on the line, a variance of 4% or 5% on either side. But no one really knows when the hard market will happen.”
Carter of Crump Professional Services sees rates stabilizing in most lines, but also cautions that we’re not yet moving off the bottom of the soft market. “Absent a lot more cat losses, we don’t anticipate any significant move upward in pricing, and I think we’ll probably languish along the bottom for the next several months if not into 2012 before we experience real changes.”
He also still sees a great deal of competition out there and some irrational behavior on an anecdotal basis with certain accounts in the various markets. “We have some newer capital in the marketplace that continues to be more aggressive than say some of the more mature capital that’s been in certain lines of business for a very long time,” said Carter. “The mature markets are really trying to push hard to get rates going in the other direction, but it’s a difficult task when you have viable, strong competitors willing to continue with price reductions to pick up what they consider to be attractive accounts.”
Hampson of Willis Programs notes that year-to-date rate action has shown a slight firming versus the same period last year. “I believe the stabilization with an upward bias is an early indication of a change in market direction.” He also sees a general hard market within the next 24 months, but believes that the amplitude this time around will be less than prior hard markets.
Oliver of 5Star Specialty Programs concurs that rates appear to be stabilizing in most lines, but “there is still considerable competition, especially on accounts that have performed well over time.” He hopes to see some upward movement “as we don’t see the level of competition in the lines we write [Transportation, Workers Compensation] as sustainable for carrier profitability, especially without the investment returns we’ve seen over the past 12 to 18 months. I believe hardening will be gradual except for the cat business.”
Additionally, Oliver notes that what while they haven’t seen any appreciable hardening in any line of business at this time, economic recovery is beginning to influence the premium exposure basis, which will drive premium increases in all aspects of the Transportation industry and Workers Compensation.
“The winds of change are already blowing in terms of hardening and markets pulling back in certain lines, especially in Workers Comp,” says The Hartford’s Suter. Hampson concurs with Suter, saying, “Workers Compensation is leading the way in price hardening. Additionally, out in front are tough classes of liability.”
All program participants agree that due to the tremendous capacity in the market this time around it will take several significant large catastrophic losses to dry up surplus. “Eventually the market will harden, as it always does,” said McKernan. “To what extent, no one knows. It might harden by 5% or 10%, but not by 50% as it did in the last cycle. There is too much capacity, too much money. Unless there is a huge natural or manmade catastrophe, it will be hard pressed for things to increase as they did before. The cat losses that have happened of late don’t come close to get to that level.”
Carter points out that the surplus ratio is still less than 1:1. “If you look way back to the hard market of 1984, the premium to surplus ratio was getting north of 3 to 1. You were bumping against regulatory issues and people had to cut their writings. We’re not anywhere close to that. And this will not be a driving factor.”
When asked about whether we’ll be seeing market players leaving the space once prices firm up, McKernan said some insurance carriers will leave, but the players who have established themselves and have significant premium in program business will remain. “Some will hike up rates; others will collapse coverage somewhat. But you won’t see the major program markets pulling out,” said McKernan. “You’ll see contraction among the periphery markets, those that think they’re in program business but really aren’t. The good 8 to 10 major program insurance companies will continue to thrive.”
Some feel that market contraction will depend on the line of business and the region. “You’re already seeing some markets pull back, as with Workers Comp in California,” said Suter. “It’s not only restricted to Comp and California, but it’s there that we’re seeing it the most right now.”
“Any pull-back will depend on a case-by-case basis,” said Carter. “If you have investors relatively new to the market and they get hammered with a few cat losses and they’re not accustomed to this business, you could very well see them thinking this is not what they bargained for and withdraw. For example, we’ve seen a competitor in New Jersey pull out of Professional Liability. But we have to keep in mind this is one particular line in one particular area.”
All agree that the industry has matured with better underwriting and technology since the 2000s, which is also one of the reasons you won’t see a mass exodus out of the space. “Given the levels and use of analytics by both carriers and program managers,” said Hampson, “I don’t believe the contraction of program business will be as extreme as the last hard market. More dynamic and proactive use of analytics has allowed carriers to address program business issues before they spin out of control.”
Suter concurs: ““There are more tools available to underwrite more scientifically.” Oliver backs this up in saying that “there’s a definite improvement in the underwriting and risk management process that most program carriers have in place today. Special attention is being paid to rate monitoring and predictive modeling as a means to appropriately price risk.”
“The companies are much better run than they were ten years ago,” said McKernan. “They’re run by financial individuals instead of marketing people, and they’re much more financially sound. You have better people running the companies who are more underwriting conscious…People will walk away from business when it doesn’t make sense because the discipline of underwriting for mature program administrators is better today than it has ever been.”
“There is a lot more expertise today,” said Carter, “at least in the lines of business we write. “The guys underwriting have credibility, a track record, and they’re able to attract capital. What’s more, their investors expect them to perform.”
Each individual we spoke to for this article all remain committed to program business for the long haul. “We at Harford are committed to the programs we’re writing,” said Suter. ““There has been no change in our commitment to grow our program portfolio. We retain significant risk on everything we do, so our focus is on profitability and exercising a lot of due diligence on the front end.”
Hampson agrees that those committed to the space are here to stay. “I believe the majority of carriers committed to program business are in it because they believe in this space and want to develop a core competency in program business. You won’t see a mass exodus from the program space during the next hard market.”
“You might see restrictions in some coverages, increases in rates, but you won’t see a massive pull out of program business,” underscored McKernan. “The only thing you’ll see is a pull out of those programs not making money. What you’ll see when the market hardens is the collapse of programs not turning an underwriting profit.”