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CHICAGO—Those waiting for a property/casualty market turn may be waiting awhile, said Insurance Information Institute President Robert Hartwig on Thursday.
Delivering the keynote address at Insurance Industry Challenges for 2012, the 7th annual symposium held by Minneapolis-based Hays Cos., Mr. Hartwig cited four criteria necessary for a traditional market turn: a sustained period of large underwriting losses, a material decline in capacity, a tight reinsurance market, and renewed underwriting and pricing discipline.
While 2011 was a year replete with catastrophes, Mr. Hartwig said the underwriting losses sustained were unlikely to have much long-term impact. “Driven mainly by cat, we did have the worst underwriting losses since 2002 last year, but it's only one year and nothing like we saw leading up to the last hard market where we had six straight years of losses in a row,” he said.
Moreover, Mr. Hartwig noted that the underwriting gains insurers have recorded in previous years have enabled insurers to build up reserves. “Another reason the market has not turned hard is that insurers have been able to release massive amounts of prior year reserves,” he said. “Reserve releases lead directly to improvements in calendar-year results; it is instant profits and reduces your combined ratio.”
Another mitigating factor on the underwriting side was ongoing weakness in demand for workers compensation coverage. Mr. Hartwig noted that net written premiums for workers compensation were down $14 billion from the peak of $47.8 billion recorded in 2005. “Workers compensation premiums began to fall even before the recession began. It's due entirely to the soft market,” he said.
Mr. Hartwig also said he saw little indication that the second criterion for a hard market, declining surplus, was occurring. To the contrary, he noted that the property/casualty industry surplus hit a record during 2011, and that weak demand for insurance was insufficient to absorb much excess capacity. Another way to constrict capacity, mergers and acquisitions, has been muted as many publicly traded companies have instead opted to buy back shares to boost their valuations. “M&A activity did come up last year, but there's not a catalyst for mega-consolidation in the business,” he said.
Nonetheless, Mr. Hartwig said he saw some indication that the third criterion necessary for a market turn, a tighter reinsurance market, was in place, albeit only in some disaster-prone geographies. “If you are buying reinsurance coverage in New Zealand, Chile or Japan, you may be paying 50-100% more, but here in the U.S. the increase is much more modest,” he said. “Much of the excess capacity in the global reinsurance market has been expunged, but there's no dislocation in the market as we saw post-Hurricane Andrew or post-9/11.”
Likewise, he said the fourth criterion, renewed underwriting and pricing discipline, was a mixed bag. He noted that the years 2007-2009 marked the first three-year period in which net written premiums had declined since the Great Depression, but that net written premiums were up an estimated 3.5% and expected to grow at a similar pace in 2012.
Thus, taken as a whole, Mr. Hartwig said that while conditions for the insurance industry were improving, a hard market was not imminent. “There's nothing really in place to suggest that we have the factors in place that would bring us to a robust hard market,” he said.
Yet, Mr. Hartwig was more optimistic about the health of the larger economy in 2012, pointing to encouraging growth in wages and salaries, a rebound in capacity utilization, and relative stability in the stock markets and bond markets. He also discounted fears of a double-dip recession or financial crisis set off by sovereign debt problems in the euro zone as overblown. “To put things in perspective, Greece has an economy the size of Alabama,” he said. “If Greece is going to derail the global economy, I am going to jump out the window.”
Poor underwriting results hampered the financial performance of the U.S. property/casualty insurance industry in 2011, according to a report released Wednesday by New York-based Fitch Ratings Inc.