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Specialty Lines Markets Have we been here before? Is competition returning to the coastal markets? By Larry G. France The sighs of relief you are hearing through the industry are the result of a relatively hurricane-free season. Although there were a few fingernail-chewing sessions during the past several months, the paucity of storms that were given names was accompanied by the fact that those few rarely made landfall. Even the recent earthquake in Hawaii appears likely to have had little effect on the industry, as most of the $100 million-plus in losses were not insured. As a consequence, the underwriting results appear to be good. What will 2007 bring us? Well, there are many issues that can have an effect on the industry that remain unanswered as of now. The cost of fuel influences a multitude of business classes, from delivery services to long-haul trucking. We have been teased lately with lower fuel prices, but they have been making an upward climb most recently. How will the results of the 2006 elections change how our industry functions? There are still insurance regulation issues on the table for 2007. The way they are resolved will affect many segments of the industry. The decline in new home sales will surely be a concern for your contractor accounts. Will the economy grow, and will Wall Street continue to perform well? Will rates go down or stay the same? Will coastal property coverage be available only with rates vastly higher than prior to Katrina, or will the historically short-term memory of the industry bring competition back—even to the coastal areas? The insurance industry is subject to possibly more different variables than any other type of business. “Reinsurance companies are claiming they will hold the line on coastal insurance premiums for two to three more years,” states Scott Anderson of Concorde General Agency and current president of AAMGA (American Association of Managing General Agents). “Some industry observers believe a federal pool or program like the National Flood Insurance Program could step in due to the unavailability of aggregate limits of liability in some coastal states.” Anderson continues, “The wholesale and surplus lines market must continue to drive the opportunities in this potentially volatile line of business. Combining a relentless focus on underwriting discipline and manuscript coverage grants, working with traditional and alternative markets, private equity investors and others, along with the aggregation of exposures can provide an affordable solution to these difficult risks. The important consideration is that we work with our markets and producers in developing those opportunities.” Anderson adds that MGAs also have to contend with continuing competition in noncoastal business. “We must remain vigilant to properly examine the quality of the capital and security that stands behind the coverage. Managing general agents have always worked to ensure that the right risk is placed with the right market. With Sarbanes-Oxley issues and other compliance standards, the consumer can benefit by the MGA’s unique knowledge of the insurer’s security and soundness of the balance sheet.” Anderson says that there may be a slight loosening of the coastal market in response to the small number of storms in 2006. The lack of storms has allowed the market “to stabilize and retrench its efforts to achieve the best pricing point.” AAMGA has been very involved in working on Capitol Hill to provide support in the passage of legislation that could have a lasting effect on the industry. Recently the Non-Admitted and Reinsurance Reform Act of 2006 (HR 5637) was passed in the House of Representatives and a companion bill will be introduced and passed in the Senate once the new Congress convenes after the start of the new year. “The workload efficiencies and cost savings to be gained with passage of this legislation alone will save millions of dollars a year, and yield positive results for consumers and investors alike,” Anderson maintains, adding that other insurance and licensing reforms still are needed. “2007 will be a year of transition,” according to William Newton of Lemac & Associates and current president of NAPSLO (National Association of Professional Surplus Lines Offices). “The property catastrophe market will again be characterized by higher attachments, lower capacity, and higher prices. The question on many people’s minds is what will happen if we go through a second year of no catastrophe claims? Will that change the market? It is getting more difficult to write profitable casualty business, which could cause some carriers to shift their resources and capital to property, which would create a softening in prices and terms. This transition could happen in the fourth quarter of 2007.” Newton says that in California, most of the catastrophe business is earthquake. Rates have been increasing 30% to 50%, along with the increased deductibles and reduced limits. “The biggest competition is from the buyers. They are balking at the terms and not buying any coverage. Many of them will not come back into the market. This also is serving to dampen the future rate increases. As a result, we don’t anticipate rates will increase in 2007 very much, if at all. “Casualty is transitioning quite rapidly,” according to Newton. “The standard markets are quoting a lot of business they have shunned over the past five years. This has been particularly evident in products liability. The E&S market in the industrial belt relies more heavily on manufacturers than in the rest of the country, and they have seen a number of accounts go back to the standard marketplace at rates and terms substantially better than what the E&S market was getting. Fewer products accounts are being written in the E&S market but just about every E&S carrier wants to write more of this business, so rates are coming down by as much as 20% to 30% and even more in mid-six figure accounts.” Newton says that the standard markets are also going after the contractors, which have been a major part of the surplus lines marketplace over the last five years, particularly in California and New York. The combination of a slowdown in construction activity and the standard markets means there is more competition among the surplus carriers, creating rate reductions of 10% to 20%. “I talked to many casualty markets during the NAPSLO annual convention in Chicago and all said they wanted to grow in 2007,” says Newton. “ The amount of business available to the surplus lines market will be smaller, so the only way to grow will be to cut rates. All the markets admitted to some slight redundancy in their current rates and all said they would do what they could to keep their renewals, but they all also said they did not plan on aggressively cutting rates. Something will have to give. I believe the casualty market will soften quite a bit in 2007. Ten percent to 15% rate decreases will be the norm, with larger and cleaner accounts being able to take advantage of even greater reductions.” We often hear that “we don’t want to cut rates,” but as noted above, if you don’t, the prime accounts will seek new homes. It is amazing that we, as an industry, have such a short memory and continually jump up and down with rates, underwriting discipline, and targeting classes of businesses. All this reminds me of a story. An elderly gentleman, impeccably dressed, starched shirt, sparkling shine on his shoes, classically tied neckwear, and a flower in his lapel enters an upscale lounge in a major city and after ordering a beverage asks the waiter, “Do I come here often?” That’s the insurance industry. “Have we been here before?” Mailed with the December issue of Rough Notes is the 44th edition of The Insurance Marketplace for 2007, with more than 675 coverages, programs, and industry services. New categories include C-80 Counter-signature Regulation, Contractual Bonus Insurance, Document Destruction, Excess Flood Insurance, Medi-Spa, Military Housing Property Managers, and Professional Insurance Industry Organizations. Upcoming Specialty Lines subjects include Commercial Vehicles in January, Contractors in February and Recreational Vehicles/Land and Water for March. * |
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