'Subtle' Price Increases Seen to Continue

Pricing for commercial lines coverage is inching up, but a "classic" hard market does not seem to be in the offing, according to J. Patrick Gallagher Jr., chairman, president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co.

"Underwriting companies absolutely know that they need to get some rate at this time and, frankly, they're getting it," said Gallagher. "My own anecdotal stories, I would say, that there continues to be strengthening in the rate capabilities from the carriers.

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"We are seeing indications of the rates continuing to firm," he said at the 2012 Keefe, Bruyette & Woods Insurance Conference, held Sept. 5-6 at the Crown Plaza Times Square Manhattan in New York.

And, while many in the industry may long for a hard market, he said, such a "spiked" recovery with its short-lived price increases is "very traumatic to our clients," and often results in clients losing coverage, being unable to get the coverage they want or turning to substantial deductibles.

"It's not a good thing for clients at all," he said, and it leaves them "angry" with brokers and carriers.

In the current market, Gallagher said, because there have been years of rate cuts, clients are seeing rates similar to those in 1999. The "subtle" rate hikes of 4 percent to 7 percent are helping carriers "get back to profitability."

"Although there is a lot of surplus, carriers understand that their loss costs are going up and have to be covered," he said.

At the same time, clients are not seeing their coverage cancelled nor their rates increased dramatically, he said.

"It is literally a great environment for brokers," Gallagher said.

KBW research analysts said the consensus of the 45 underwriters and brokers who presented at the conference believe pricing will continue to improve, "albeit gradually," for U.S. commercial lines, with the possible exception of workers' compensation.

For his own organization, Gallagher said he was "very, very bullish" on organic growth, noting the company added about 10 percent to 13 percent of new business each year, while losing about 5 percent.

He also noted there was "a huge need for expertise" in the benefits world due to health care reform, and said the brokerage sees a significant opportunity to work with clients in that segment.

In addition, he said, the company constantly reviews potential mergers and acquisitions and sees "strong momentum" in that area. Gallagher has completed more than 300 acquisitions since 1986, he said.

-- By Anne Freedman

October 11, 2012

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