Expert Commentary

It's 2005—Do You Know Where Your Market Is?

March 2005

Do you know where your market is? Do you have any idea where it will be in 2006? Lord knows I don't, but it does make you wonder just what does the insurance marketplace think about when, after a decade and a half of an insane soft market, it believes all has been resolved in less than 2 years of a so-called "hard" market.

by Peter M. Polstein

Here we are in 2005 facing what appears to be the "beginnings" (oh no, not again) of a market driven by "share" underwriting. Why not—the past 15 years or so of loss ratios over 105 percent, many over 110 percent, some over 120 percent, are a thing of the past. Right?

Reserves

Insurers and reinsurers have always held that their ability to reserve for claims is actuarially sound. After all, don't they tell us so when they sign off in December on their Convention Statements, 10Ks, and other documentary evidence? Yet, over the past 2 years, you have to ask if these reports are so profoundly accurate, how is it that almost every major insurer has seen fit to take huge write downs to correct insufficiencies in their reserves?

Allegedly, the causes were losses which occurred over a lengthy period. Were they losses that no one knew about? Were they unexpected? Were they known? Or in the end, were they simply under-reserved with poor actuarial trending and development as the basis for the insufficiencies?

There is no question that the marketplace has increased gross and net writings in what has been described as substantial numbers, yet the one number which may tell the tale—reserves—has not increased exponentially with the increase in writings. In fact, how many have seen commentary after commentary (Fitch, S&P) warning that overall reserves are substantially short by many billions of dollars. It is fascinating that if you track a large majority of the insurance industry's loss ratio in any given year, and revisit it say 5 years hence, the number magically is substantially larger than the stated year. Certainly, claims adjustment costs and specifics change, but at what actuarial level does the originating year entail?

Looking to the Long Term

If you will excuse this diatribe, what does it have to do with the market? Just this: Assuming you have a client base which is primarily interested in mutual long-term commitments, which must be a two-way street, I would caution that becoming embroiled in market share broking does not inure to anyone's benefit.

Obviously, there has to be some quid pro quo. We must assume that renewals, especially on "good" business, continue to enjoy whatever negotiated terms and conditions have existed in the past, and that premiums are reflective of the true nature and value of the risk.

Good broking techniques, sound knowledge, a professional understanding of the marketplace, including those techniques which are inventive, should carry a broker/agent relationship with the client toward long-term affiliations.

How the Market Turns

Over the past few months, especially since December, I've heard nothing but "stories" of how the marketplace is turning, has turned, and is heading toward the good old days of pre-September 11, 2001. Interestingly, my personal view is that September 11, as horrendous as it was for all of us, especially those of us with friends in Towers I and II, had really not a great deal to do with a hardening marketplace. It may well have been a convenient and somewhat unsubstantiated reason, but it did not disguise the fact that after a protracted period of basically poor underwriting judgment, it was payback time.

To be caught up in another market share underwriting cycle does neither client, broker/agent, nor insurer much good. There are simply too many downside circumstances which have a habit of biting.

I suppose all of this doesn't concern a client or client base which always markets accounts on an annual basis, always looks toward the potential of minimizing their premium dollars. It's their dollar, but from a professional standpoint, rarely have I ever seen this philosophy work to the benefit of the client.

I really can't pass up the opportunity to briefly provide my thoughts on some of the criminal and regulatory issues that have been leading headlines during the past months.

Bid Rigging

There is no question in anyone's mind that so-called bid rigging is in and of itself illegal. The basis of settlement however, begs some interesting questions. I recently wrote a reply in an insurance journal where I acknowledged that "bid rigging" was illegal, but went further saying:

  • But the bigger question is how the hell does any prospective client of Marsh, or x client come to prove economic loss, to gain a portion of this settlement.

  • The majority of this client base is not unknowledgeable insurance clients. A great many are handled with informed risk managers. The question of the day has to be, was the specific client unhappy with the outcome of their renewal negotiations, when most had familiarity with the marketplace? Given that assumption, and the time and place of negotiation in a marketplace with specific underwriting philosophy, how do you prove your loss? The mere fact that two or three carriers were used to provide whatever quotations to prove or disprove a particular premium base, did the final outcome become a loss potential under this scenario, irrespective of the fact that Marsh did rig the deal, but to whose benefit?

  • Marsh—did the insured physically suffer economic loss?

Contingent Commissions

The other portion of this entire legal situation was the evident loss by a great many legitimate broker/agents of contingent commissions, which in many instances make up a substantial portion of overall income. It is ridiculous to suggest that contingent commissions, which are geared to overall good loss ratio, have a whit to do with any other matter which has come to the public's attention during these "painful" past months. It is not only unfortunate, but a "black eye" on an industry where the vast majority of professionals have had nothing to do with these events.

Do we know where the market is going in 2005? We don't, but we all can hope that past mistakes, lapses in judgment, do not again provide a marketplace in turmoil.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.