HEADLINES - HEADLINES - HEADLINES

Aldrich & Cox subscribes to numerous insurance and risk management publications, such as Business Insurance, National Underwriter and Risk and Insurance. We thought you might be interested in some of the news reported the last few months, dealing with the "hard market" we are faced with now.

The following headlines and related information are but a few, all selected from the National Underwriter, a publication aimed mostly toward insurers and brokers.

"Prices Rising, Covers Shrinking for 2002" (December 17, 2001)

This article reports on warnings to commercial insurance buyers. One major insurance broker told its clients, "For now and the foreseeable future, rates will be substantially rising throughout the property and liability lines, ranging from a low of 20 percent to as much as 600 percent on some lines and particular risks." It goes on to say the sharp hikes are being prompted by the attack of September 11, years of unprofitable underwriting and declining capacity. The article ends with the broker suggesting, "There is good news on the horizon. . . . Prospects should improve as premiums rise and capacity for insurance and reinsurance expands." The final prediction is that the market-hardening "atmosphere would last two years before stabilizing."

"Avoid Price 'Gouging,' Consultant Warns Insurers" (January 14, 2002)

This article summarizes comments by an actuary from a large actuarial consulting firm who says, "there's clearly an opportunity now for [insurance] companies to price gouge -- and it's happening." Further, she thinks "companies are overreacting, because they see a window in which they can do it."

"Coverage Crisis Looms, Insurers Warn" (January 28, 2002)

A recent hearing held in Washington by the Reinsurance Task Force of the National Association of Insurance Commissioners (NAIC) was an attempt to get Congress to pass legislation providing insurers with protection against terrorism losses. Reinsurers covering insurers for large losses excluded terrorism in their January 1, 2002 renewals, leaving insurers to pay all such losses in states that have not approved terrorism exclusions in policies. In a related development, a February 4, 2002 article headlined, "NAIC Votes Against Terror Exclusions in Personal Lines," reports the Insurance Commissioners of 45 states voted unanimously to ban terrorism exclusions in personal insurance policies.

"Pricing Competition Returns to Re[insurance] Market" (February 18, 2002)

The London Editor reports $16 billion in new capital raised since the World Trade Center attacks. He goes on, "Concerns [are] that this capital may undermine the reinsurance market's ability and willingness to sustain higher pricing . . . [and] the likely duration of hard market conditions." But the article goes on to say an immediate return to soft market conditions is unlikely. (Author's Note - Subsequent articles report even more capital has come to the insurance industry.)

"Is the Hardening Market Doomed to Fizzle in 2002?" (January 21, 2002)

This article reporting on a Property/Casualty Insurance Joint Industry Forum contains a number of quotations from industry leaders. The reporter says analysts warned the hard market "is doomed to lose steam unless another terrorism attack or natural disaster hits." Ninety-one percent of the industry leaders responding to a survey at the forum predicted the hardening of the commercial Property Casualty market will continue through 2002.

Some other "forum" comments we liked were:

"[M]any companies that were hit hard on 9/11 entered the 1/1 renewal season with at least as much, if not more capital than they had on 9/10." (Alice Schroeder, Managing Director of Morgan Stanley in New York).

The "p-c cycle will be shortened in a dramatic way because capacity moves in more quickly today." (Kenneth Froot, Professor of Business Administration at Harvard University).

"This industry is like an alcoholic waiting for its next drink." "[I]nsurers have destroyed much more capital via mismanagement than terrorists did on 9/11" adding, "this industry has never shown that it could sustain any underwriting discipline." (Ed Kelly, Chairman, President and CEO of Liberty Mutual).

Herman Arends, Chairman and CEO of Auto-Owners Insurance Company agreed saying that "less successful carriers will throw underwriting discipline out the window as they have in the past."

Other articles discuss the pros and cons of government backed terrorism reinsurance for insurers. Still others discuss the prospect of insurer and broker stocks benefiting from the hard market. We will end with the most pessimistic view of Tapley Johnson, President of the National Association of Professional Surplus Lines Offices (NAPSLO) who, in the March 4, 2002 issue, predicts the hard market lasting more than three years. Since his organization's members write the tough risks and usually write much more business in hard markets, we think this is wishful thinking.

My personal view, presuming no more significant terrorists attacks, is the hard market will start to soften in 2003 with price competition returning in 2004.

-- Charles H. Cox

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