There is much debate over whether or not the insurance market is hardening. Some believe it has yet to see the rising prices and decreased capacity indicative of a hardening market. They note that some carriers are trying to gain market share by lowering price. So, is a hard market coming? Looking at the general indicators of a hard market helps answer the question-especially considering every factor trends negatively.
1. Lower Underwriting Profits
In 2007 and 2008, the market saw negative premium growth for the first time since 1943.
2. Increased Combined Ratio
In 2007, the combined ratio (losses in claims plus overhead divided by premiums) for the insurance industry was 94%, which increased to 106% in 2008. (A combined ratio over 100% is unprofitable for insurers. The 106% ratio means insurers were paying out $106 dollars for every $100 of premium collected).
3. Lack of Investment Income
The industry can no longer make up for unprofitable underwriting through investments. Investment gains were off sharply in 2008 due to lower yields and poor equity market conditions.
4. Increased Catastrophic Losses
In 2008, there was $25 billion in estimated catastrophic losses-worse than 2006 and 2007 combined.
5. Return on Equity Falling
ROE is close to record lows. And the 1.2% posted in 2008 is eerily similar to the start of the 2000/2001 hard market.
6. Reinsurance Hardening
Due to price increases in the property marketplace and increases in D&O coverage due to the financial crisis, 2008 and the first quarter of 2009 have shown definite signs of hardening in the reinsurance market.
7. Reductions/Capacity
Surplus is a measurement of underwriting capacity-and it is shrinking. Since the peak capacity of $522 billion was reached in September 2007, industry capacity has fallen by 20%. Further declines are expected for 2009.
Rick Stasi is the chief operating officer of Avizent.
AIR Brings Cat Expertise to the Masses
One refrain that is almost universal among risk managers is the fact that insurers rarely understand-or at least rarely acknowledge via premium rates-their organizations' unique risks. But in many cases, these same risk managers themselves fail to fully understand the nuts and bolts of the key operational factors that pose the largest threats. Particularly when it comes to the structural risks of their industrial facilities, there is often a disconnect between how vulnerabilities are perceived between those sitting behind a desk running the numbers and those walking the floor running the facility.
To help bridge this divide, AIR Worldwide has launched its Catastrophe Risk Engineering practice, from which the company will send one of its structural engineers to conduct a detailed assessment of how any disaster could damage every lever, pipe and wall in a facility. Often, the identification of such threats is based on speculation and generalities, where as it takes a thorough walk-through and a detailed checklist to truly gauge the unique risks posed to the facility.
Especially as risk managers try to ensure proper mitigation in the face of declining budgets, there may be many benefits to seeking AIR's external expertise, which includes earthquake/wind engineering services, post-event damage assessment and repair development. "Risk managers were telling us they need this, but can't find it," said Dr. Akshay Gupta, who heads the practice. "No one was targeting the corporate-level risk managers who might need something more detailed than portfolio-level analysis."
For AIR, this new practice is essentially designed to bring its macro-level catastrophe expertise to the micro-level. And in addition to physical damage assessments, business interruption analysis is also provided. "When we look at something in that excruciating detail, we're also looking at the entire business process," said Gupta. "It's driven by the physical damage, but it encompasses the whole process of business interruption."
Thus far, AIR has focused this new practice on industrial facilities and off-shore operations including oil rigs, but as the practice gains size and experience, the company will be pushing further into the commercial facility, hospitality and health care sectors.
Jared Wade is editor of Risk Management.
