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By MATTHEW BRODSKY, senior editor/Web editor

It might be stating the obvious at this point. The market is soft.

But what sets this market apart and what could make it potentially more frightening for all involved is the fact that the general economy is also in the depths of a profound down cycle.

Combined ratios are into the high 90s from the low 90s last year because of losses, thanks to "huge" growth in noncatastrophe losses, according to Chris Roak, head of the Marsh Philadelphia office. Meanwhile, accounts are seeing price drops on average 10 percent to 20 percent across all lines (with some exceptions, like D&O and financial institutions). Roak's seen renewals going for half price in some instances.

"I'm not sure there's great pricing discipline now," Roak said.

As Roak pointed out, net premium writing is down in 2008, as it was in 2007. The insurance industry hasn't seen that since, Roak guessed, the 1940s.

Speaking at the annual Brokers Forum of the Delaware Valley chapter of the Risk and Insurance Management Society Inc., Roak and Austen had plenty of support from the other brokers on the panel.

Marc Armstrong, managing principal for Aon in Philadelphia, added to the list of industry pressures the high CAT losses (more through June 2008 than in 2007 and 2006), "incredible" competition, the spillover effects of the housing credit crisis and the added pressures of the ratings agencies. He's seen more and more carriers giving multiyear deals to clients to keep business.

Charles Bernier, president and CEO of ECBM Insurance Brokers and Consultants, also has seen two- and three-year deals getting done, but warned risk managers to be wary before signing the dotted line. Make sure the carrier is financially sound first, he said.

Bernier sounded a bit more upbeat, though, when it came to overall economic deterioration's effects upon insurers. He looked back at Japan in the 1990s, when its economy went deflationary. Then, Japanese carrier premiums went down with GDP, yet insurance profits went up. How?

He explained that Japanese insurers reserved at today's dollars but paid out claims in 1990s dollars, meaning less money was going out.

Still, that is not to say that the panel sounded bright and sunny on the insurance industry's chances of weathering this soft market storm. The going timeline according to these broker executives was at least 12 to 18 more months of soft market. That's thanks to the plenty of capacity and capital (the supply) chasing a stable amount of demand, as Austen pointed out.

Yet as Austen also warned, he and other brokers cannot say how long this spell will endure.

A hard market could be around the corner. And it could be harder than usual. A typical hard market comes in fast but ends faster than soft markets because capital comes to the rescue.

But with capital markets writing off $400 billion and counting of their own losses, Austen said, "capital markets are looking to work through their own storms."

The availability of hard market capital would be less certain. The industry could face questions of capital and reserve adequacy should massive subprime lawsuits or some other "shock" event play out, according to Austen.

"The crushing impact they would have would be frankly difficult to bear," he said.

Even if you don't believe in doomsday theories, typical CAT and non-CAT losses eventually will have to add up to an end of this market, right?

"As the combined ratio creeps up to 100, it begs the question when there could be a turn in the market," said Armstrong.

Or maybe not. Roak suggested capacity can bear a lot, so it would take multiple factors to change the market, including the mortgage fallout on Wall Street and loss hits.

October 15, 2008

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