|
2007-2008
|
Insurance Market Insights
 |
Global economic growth has been shaken by a financial crisis that was sparked by the meltdown of the U.S. subprime-mortgage market and described by the IMF as the largest financial shock since the Great Depression.
In this environment, Lockton clients are pressured to reduce costs and mitigate risks.
SHIFTING INSURANCE MARKETS
While the cost of many goods and services—including employee benefits—has been increasing, the price of property casualty insurance has been falling.
Excluding coastal property coverage, which saw sharp increases after Hurricane Katrina, commercial insurance prices have been dropping since the fourth quarter of 2003, according to the Council of Insurance Agents and Brokers.
Even though the pace of the decline has started to slow in some cases, prices may fall even further still. After posting exceptional profits in 2006 and 2007, property-casualty insurance carriers are swimming in capital and are looking for ways to put it to work.
While profit momentum slowed in the first quarter of 2008 due to increased catastrophe activity and the impact of the subprime problem, it’s still a buyers’ market and insurers are often willing to bend on price, terms or conditions to retain established clients.
By preparing now, our commercial insurance clients will be ready when the insurance market hardens and prices rise again.
MARKET INSIGHTS
Property
Turmoil in the economy and financial markets is forcing many businesses to scale back their operations while raising prices for the consumer.
The property insurance market, however, has been much more resistant to what is taking place in the broader economy.
That’s because property insurance prices are dictated not so much by the economy; rather they are affected by losses, especially losses arising from catastrophes.
With catastrophe losses low during the last two years, the property insurance business has been profitable. In 2006, the industry turned in its best underwriting performance since 1949, with a combined ratio of 92.4. While the underwriting performance deteriorated to 93.8 in 2007, it is the second lowest among all combined ratios of the past 40 years.
However, the marketplace is so volatile that a single massive catastrophe loss could change the market overnight.
For now, however, the market continues to be profitable. Strong profits attract capital and new capital spurs competition. Underwriters have been reducing prices and have become more liberal with terms and conditions, both of which are beneficial to today’s insurance buyer.
Although property insurance prices are generally moving lower, the actual terms will vary widely for individual clients, depending on factors such as their catastrophe exposure and loss experience. For that reason, each client’s program needs to be individually tailored as no one program fits all.
| Simply put, it’s a buyers’ market and insurers are often willing to bend on price, terms or conditions to retain established clients. |
Casualty
The casualty insurance market is now in the fourth year of a competitive pricing environment. While it’s impossible to predict exactly how much longer the soft market will last, if the past is any indication, it will remain soft for the foreseeable future.
The previous soft market, for instance, lasted 13 to 14 years, beginning in the early 1990s after the latent pollution and asbestos exposures as well as claims from the Bhopal India disaster subsided.
In this latest soft market, capacity is plentiful for most industry groups. The one exception is the pharmaceutical industry, where capacity can still be limited.
Underwriters in general, however, have a lot of capacity and are eager to put it to work and that is putting pressure on the market. We expect that insurance buyers will see average premium reductions of 10 percent to 15 percent for the next 12 to 18 months in the workers compensation, general liability and automobile liability sectors. Some buyers may also be able to improve program terms, limits and conditions, including increased limits and decreases in their deductible or retentions.
Clients that have not solicited bids in a few years may see even greater premium reductions than clients that recently marketed their business.
While reductions are the norm, the biggest savings can come when we strategically market our client’s business to alternative insurers. There is value, however, in maintaining existing relationships. Continuity of service, collateral and scope of coverage are critical considerations when assessing alternate options.
Buyers should approach incumbent insurers several months ahead of their renewals to secure a favorable renewal commitment. Many insurers are willing to provide this commitment to maintain the existing relationship. If the commitment is not in line with current market conditions, alternate strategies can be pursued.
While the casualty market may remain soft for some time, buyers should keep in mind that prices can go only so low.
Executive Lines
It’s been nothing but blue skies for most buyers of Directors & Officers insurance. Capacity has been plentiful and through a combination of good loss experience and supply and demand, most clients have experienced rate decreases. Prices have been declining for more than three years and that trend is likely to continue through 2008.
Rates for employment practices and fiduciary liability have been declining as well.
But dark clouds are starting to gather on the horizon.
The downturn in the economy, write-downs on securities held and loss of stock market capital are likely to lead disappointed investors to file more lawsuits against directors and officers.
A two-year drop in securities class actions, for instance, has reversed course. During 2007, 177 cases were filed, up from 118 in 2006, according to Stanford Law School’s Securities Class Action Clearinghouse.
Financial institutions are prime targets. After being hammered in the current financial crisis, investors are now suing these companies and their senior executives.
Already there are almost 200 lawsuits from the subprime situation, with 66 of them related to alleged securities violations, according to Advisen.
With these lawsuits looming, rates are starting to rise sharply for financial institutions and the amount of available capacity is beginning to shrink. Financial institutions with little or no exposure to subprime and other troubled investments must differentiate themselves from other companies in this sector.
While prices are on the rise for financial institutions, non-financial companies should continue to see a decline in prices, although these reductions will not be as steep as they have been.
In the area of network security and privacy, Lockton has seen a tremendous increase in privacy losses and security breaches leading to either notification requirements, which can become very costly, or other non-physical losses.
EMPLOYEE BENEFITS |
While the price of most types of insurance has been declining over the past few years, the premiums for employee benefits have been rising rapidly. Wellness programs alone are not getting enough results.
National healthcare expenditures are projected to nearly double between 2006 and 2015 (see chart), causing employers to increasingly worry about their ability to afford these important healthcare benefits. With increasing premium costs resulting in higher monthly premium contributions for employees, both parties are looking for solutions to curb the predicted trends.
For years, employers have stood back from involving themselves in their employees’ lifestyle and wellness orientation.
But employers are increasingly aware of the fact that they cannot write a blank check year after year. To control costs employers are playing a more active role in helping their employees lead healthier lives.
Health Risk Management programs provide employers with analytical tools that help them better understand their employees’ health problems. Armed with that information, employers can then provide employees with educational programs to take better care of themselves.
Although Health Risk Management involves an initial investment, it has been effective in reducing the number of high-cost healthcare claims.
In addition to the rising cost of healthcare, employersare also concerned about the upcoming U.S. presidential election and the possible changes that may be made to the country’s healthcare system.
It is too early, however, for clients to lose sleep over this. While the next president may seek to push through reforms, it won’t happen overnight.
|
Medical Liability
It was only a few years ago that the medical malpractice liability market was in crisis.
But as prices skyrocketed and insurers mended their underwriting standards, the market began to attract new capacity. These underwriters, unburdened by legacy claims, are now competing aggressively for new business.
Established markets, having repaired their underwriting operations, are not sitting idly on the sidelines either. They have a lot of capital and they want to deploy it. This is creating an intensely competitive environment.
New patient safety initiatives, meanwhile, have helped to reduce claims frequency. Claims severity, however, continues to be an issue, except in states where meaningful tort reform has been passed.
The result is that the medical malpractice liability market is now in the second year of a soft market. Buyers are seeing average premium reductions of 5 percent to 15 percent—and in some cases even more.
| A competitive market offers insurance buyers the opportunity to save money and expand coverage at a time when they are under pressure to reduce costs. |
LOOKING AHEAD
The last two years have been good ones for insurance carriers. Losses have been low and profits have been high. That, in turn, has attracted new underwriting capital.
This has created a competitive market that offers insurance buyers the opportunity to save money and expand coverage at a time when they are under pressure to reduce costs.
While there’s nothing wrong with saving a few dollars, it is not enough to just chase the lowest price.
We recommend clients take the time now to develop a sound insurance buying strategy. It is human nature, of course, to focus our time and attention on the crisis at hand and to put everything else on the backburner.
Planning now will pay big dividends when the inevitable turn in the market occurs.
|
|