In the wake of a historically profitable 2006, another good year ensued, though a long-anticipated and significant downturn in pricing began to develop by midyear 2007. It's a slide that continues and is likely to continue for some time.
That was the consensus of a panel of property/casualty company experts during an early June panel session at the Standard & Poor's insurance conference in New York. Participating were William R. Berkley, chairman and CEO, W.R. Berkley; Frederick Eppinger, president and CEO, The Hanover Insurance Group Inc.; and Henry Keeling, executive vice president and chief operating officer, XL Capital.
Is the downward trend anywhere near the end of its course?
"We're a long way from the end," said Berkley, whose company has lost 80 percent of its accounts with premiums greater than $150,000 due to price competition. He thinks the industry is break-even now.
"Next year will be a tough year for the industry," Berkley said.
Keeling had a somewhat different fix. "The market is good in parts, bad in parts....There are places where you don't want to go and business you don't want to see." The big question he asked was: How is the 2007 renewal book coming along? With a 7 percent rate reduction on renewal, say, how much was the price going down on the book that was lost? It's significantly more, he suggested.
"We are very concerned about where the market is going," said Keeling.
"Across the industry, '07 was OK, '08 not so good, and I'd be quite worried about '09," he said.
Eppinger worried aloud about changes in terms and conditions, which seem to be especially magnified in long-tail casualty business. Keeling appeared not to be so worried: "We haven't seen wholesale deterioration in terms and conditions, particularly in the large casualty business," he said.
What of speculation that a softening market will manifest itself in earnings? Will this foster the illusion that things are better than they are?
Here is what Keeling had to say: "There are a number of factors here which will lead to a more rational market: (1) the impact of Sarbanes-Oxley; (2) more vigilance, internally, with management, enterprise risk management a part of that, underwriting discipline--boards more aware of what's happening; and (3) more external vigilance, from ratings agencies in particular and from investment analysts."
Also, said Keeling, there isn't as much readily available reinsurance capacity as in previous soft-market cycles, where you could get as much AAA-rated reinsurance as you wanted. That's just not there today."Reinsurance market discipline is generally holding up, but it is also putting pressure on the insurance markets to take a more rational view through this period of time," he said. "It will be a more rational market, but I wouldn't get overly optimistic about it."
"I wouldn't be optimistic at all," seconded Berkley.
And you can include Eppinger in that view.
"In the next three years, there's going to be some pain...I think for commercial we're in for another good three years of excitement."
August 1, 2008
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