Market Outlook
In our July 2004 issue article, "The Party's Over," we suggested we, as insurance buyers, should all be looking for stable pricing in the near term, and eventually some reductions. We are now seeing some of those reductions, and the trade press is reporting more.
A top story in the January 3, 2005 issue of the National Underwriter headlined, "P-C Insurers Boost Profits, But Concerns Loom." The article goes on to say, "Insurers were thrilled to see net after-tax income rise nearly $6 billion during the first three quarters of 2004, while posting an underwriting profit . . . ." The combined loss ratio (losses incurred to premiums earned) of 97.9% during this period was the best nine-month figure in at least 19 years. (Anything below 100% is profitable.) This was in spite of four hurricanes in the third quarter. The concern that looms, however, is a slowing growth in premiums caused no doubt by more competitive renewal pricing.
The January 2005 Industry Focus supplement to the National Underwriter quotes insurance analysts saying, "The hard market peaked at the end of 2003 and start of 2004," and "[t]he long-expected turning of the cycle has finally begun." Others comment that "[t]here appears to be adequate capacity to write business" and "to expect continued reduction in commercial property and general liability lines."
There are exceptions, of course. Terrorism, professional liability and medical malpractice coverage may even see some premium increases. Insurers are getting very concerned about the December 31, 2005 expiration of the Federal Terrorism Act. Terrorism exclusions for nuclear, biological or chemical acts are being added indiscriminately. Other coverage terms are being restricted to reduce even Property coverage. A major insurer's new Property coverage forms now present significant problems for some insurance buyers. While we expect to see more premium reductions, they may be coupled with some offsetting coverage reductions.
While the publication, Industry Focus, says the "(Insurance) Industry expects smooth sailing in 2005," we don't believe that will always be true for the insurance buyers.
-- Ernest A. Holfoth, CPCU, ARM
Vol. XVIII, No. 1
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2004 was a busy year for Aldrich & Cox, and we expect much of the same for 2005. It was also an interesting year for the insurance industry in general, with a return to profitability after the most recent hard market, punctuated by multiple, severe natural disasters, and broker/insurer scandals. In this issue of Analysis& Comment, we feature articles on what we hope will be the next soft market, the pros and cons of filing Homeowners claims, and how to investigate a Workers' Compensation incident. Although this last one is aimed at municipalities, it offers insights for all employers. We are also reprising excerpts from an article Charlie Cox wrote nearly nine years ago on some of the pitfalls of broker compensation. With what happened as 2004 drew to a close, it sounds almost prophetic. One aspect that he touched on in 1996 that has not surfaced recently is the issue of interest earned by brokers on fiduciary funds, or the "float" between the time premiums are paid by an insured and when they are remitted to the insurance company. For one major broker, this amounted to $94 million for the first three quarters of 2004. Could this be the next target of the regulators and prosecutors? --- Ed.
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