Market Outlook
Last January, we reported trade press articles predicting that the hard market had peaked, and many foresaw commercial insurance premium reductions for 2005. This forecast was correct for many, if not most of our clients' general insurance programs. While these reductions were often modest, it was good to see the premium increases of the previous few years basically stop and reverse. What is likely for 2006?
The catastrophic property losses caused by the major hurricanes this year were initially projected to slow property premium reductions and increase property insurance rates in some regions. A headline in the National Underwriter was, "Hurricane Katrina Could Wind Up As Biggest Insured Loss Ever," topping the $20.3 billion posted by the property-casualty industry by Hurricane Andrew in 1992 and the $19.5 billion suffered in the September 11, 2001 terrorist attacks. Losses for the entire hurricane season are projected to top $50 billion. But even the multiple hurricane losses are not forecast to cause major disruptions in the overall insurance market, the exception being for Property insurance.
As late as November 2005, the National Underwriter was running headlines like, “Across-the-board price hikes not seen on the horizon” and "Market Still Rational Overall, Buyers Say." Property-casualty insurers' results for 2004 reflected a 98.1 combined loss ratio (before investment profits), the lowest since 1978. (The break-even point is 100.) While the first quarter of 2005 results were the best ever with a 91.9 combined loss ratio, year-end estimates are putting the ratio for all of 2005 at about 105.3.
In recent remarks at the Goldman Sachs Financial Services CEO Conference, Marsh's Michael Cherkasky said that, while it is premature to know the impact of the season's hurricanes, it is inevitable there will be broad-based insurance price increases. For year-end Property renewals, accounts with catastrophic exposures are reportedly seeing double-digit rate increases, and this is likely to get worse as January 1 reinsurance treaty renewals are negotiated. Accounts without a catastrophe exposure are actually projected to benefit from this as capacity may move to the noncatastrophe business, increasing supply in those areas.
As we have stressed previously, insurance companies do not need a reason to increase rates; all they need is an excuse. Now they have it and they intend to take full advantage of it. This should be true for primary coverage, and for reinsurance, as well. In a December 12, 2005 National Underwriter article, "Hurricane Losses May Have Silver Lining," the writer predicts that Property rates at Lloyd's will increase about 12.5% overall, with specialized U.S. catastrophe reinsurance rates increasing 23%, and offshore risks increasing up to 46%.
Thus, for the consumer the news is doubly bad - the number of catastrophes seem to be increasing and the cost to insure against the disasters will definitely increase. Some insurance companies will be much more selective about what areas they are willing to write, and others will be offering more limited coverage (with larger deductibles expected for windstorm, as an example). For those that want and need good coverage, the cost will be high.
We do not foresee any substantial premium increases for most of our clients who, for the most part, had little hurricane exposures. We do look for more coverage limitations resulting from insurance revisions being implemented by insurers in many states, along with modest rate increases.
For other lines of insurance, the outlook is not as bleak. General Liability premiums may actually decline, while Workers' Compensation and specialty lines such as Directors & Officers Liability and Professional Liability are expected to remain stable.
-- Ernest A. Holfoth, CPCU, ARM, and James B. Hood, Jr., CPCU
Vol. XIX, No. 1
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As we did in 2004, we are starting off the year with a summary of the collective thinking in the insurance industry as to what to expect in the way of premiums in 2006. As everyone is aware, 2005 was probably the worst year on record for natural disasters, especially if you include the tsunami right at the end of 2004, and these catastrophic events cannot help but have an adverse impact on insurance costs. Fortunately for some and unfortunately for others, however, these higher costs will not affect all insureds and all lines of coverage equally, giving us all added incentive to be vigilant with our renewals and to question all rate increases. The other major story for the first of the year is the startup of Medicare Part D, that we reported on from an employer's perspective last July. Over 20 million people are now enrolled, 3.6 million in stand-alone prescription drug plans, and the rest being transferred from Medicaid, federal retiree plans or other plans. As with any bureaucratic endeavor of this size and complexity, Part D has not been without its initial glitches. In fact, a number of states have had to step in and pay for some seniors' prescriptions, hoping to be reimbursed by Washington. The dire predictions of total chaos, however, do not seem to have been proven out. --- Ed.
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