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The pricing cycle in the European noncatastrophe property/casualty sector, influenced in part by "irresponsible behavior in the market," is at rock bottom or close to it, and buyers looking to renew can expect prices to rise again at the end of next year or in 2009, insurance executives said.

"Irresponsible behavior" occurs when carriers, under pressure to maintain their profit margins in an environment of declining prices, don't charge enough for the risks they underwrite in an attempt to nibble away at market share from competitors.

Clive Tobin, CEO of London-based XL Insurance, said pricing in the European market was by and large fair and adequate. Aviation lines, for example, had flattened out. But he too had noticed "more irresponsible behavior in the market."

Nick Beck, head of corporate clients for Zurich-based Swiss Re., said that what underpricing, if any, was taking place was not widespread. But when asked if he thought there would be enough capacity in the market in 2008, he left no doubt that prices could very well rise. "We have it as long as we achieve the necessary terms for ourselves and shareholders," he said.

The executives spoke during a meeting of European risk managers hosted by the Federation of European Risk Management Associations in Geneva in October, a time of year when insurance buyers turn their attention to their contract details in preparation for January renewals.

Property/casualty prices have been on the decline in Europe over the last four years, despite severe flooding that has affected Germany and England. So soft have prices gone, that the London-based excess and surplus lines carrier and reinsurer Lloyd's, despite a tradition of covering European risks, is more interested in underwriting risks in other parts of the world, at least for the time being.

The price declines are good news for risk executives who can look forward to stronger negotiating positions at renewal time. Indeed, it's not unusual for insurance executives to even engage in a little bit of gamesmanship and drop hints of a price increase, justified or not, to maintain their own negotiating positions.

Beck, for example, said that carriers have a responsibility to keep prices from going down too far too fast and thereby "sustain" the market to avoid what he called "price amplitude," or giant swings from price peaks to troughs.

Sarah Turvill, chairwoman of the London-based broker Willis International, said that she expected prices to rise with the 2009 renewals or shortly thereafter. She, too, extolled the virtues of market stability. In volatile pricing environments, she said, "You're a hero when prices go down and pilloried ... when prices go up."

Better keep prices stable. And if buyers raise a stink because they still aren't getting the price break they think they deserve for their 2008 and 2009 renewals, the executives were quick to remind buyers of the new world the industry was now dealing with.

Higher capital requirements imposed by the European authorities, and a colder analytical eye cast upon carriers' financials statements by the ratings agencies, mean that even the slightest weakness in the balance sheet is going to raise a red flag.

So, when will the current downward cycle end?

Jeremy Brazil, director of reinsurance and London underwriting for Markel International, said buyers can expect to see increases sometime during the 2008 or 2009 renewal seasons; and Dick Verbeek, chairman and CEO of Aon Risk Services International, said, "We might be at the neutral point at the moment."

Turvill, with nearly 30 years of experience, delivered the most succinct, and possibly the only correct, answer. "Nobody knows," she said.

December 1, 2007

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