Where Is the Market Going?

June 2006

Where is the market going? Good question. Ask anyone in the industry, and they'll provide you with their favorite answer, espouse their favorite theory, or just look at you with either a smile or a blank face.

by Peter M. Polstein

Can anyone remember the "hard market"? Oh yes, that's the market that most predicted sometime at the end of 1983—oops, sorry, 1993, or was it 2003? In actuality, it was but a brief fleeting moment between 2004 and 2005, just before the marketplace took a brutal hit from a bunch of Atlantic hurricanes. After the fall, perhaps it was a fall of 2005, most everyone began the hard market mantra, property markets will, even some casualty markets will, reinsurance will, will what? Will go back to the good old days of market share.

At the end of 2005 through the early days of 2006, the Bermuda marketplace, for example, received in the vicinity of $20 billion in new surplus, origination of new insurers, and the interesting rhetoric by some that much of the "new" capital was headed toward underwriting catastrophic coverage. My first impression was, well, okay, investors are tired of seeing their surplus dollars eroded over a protracted period of time. What they really want to see are losses that they can touch, feel, and have the knowledge that X amount will be paid over a specific period of time. It made sense.

Pundits continued to espouse the theory that certain covers in the marketplace would be near impossible to either purchase or afford. The wind, storm surge marketplace all but disappeared within the last few weeks, but not before a fair amount of cover was bound, admittedly at much higher prices, and certainly with much higher retentions by those who could afford the cover. Strangely, the folks who model and forecast catastrophic occurrences, and haven't been right yet, have been quiet.

Recently, a "select" group of reinsurers provided first-quarter results, with a modest increase in overall loss ratios, which are meaningless until they mature, but the net written had decreased against increases in risk. That begs the question: hard market?

During the past week, forecasters have laid their predictions for the 2006 Atlantic storm season. It appears that we'll sustain some 16 to 18 named storms, 8 to 10 of which will be serious, and some 4 to 6 of which will be category 3 or better, with the advisory that the East Coast of the United States continues to be a target.

It is fascinating that a wide variety of governmental, state, municipal agencies, and groups have discussed ad nauseum the potential for catastrophic loss, together with our own industry, but no one has been able to articulate a plan which makes any sense. And all of this presupposes that we'll not see a major earthquake.

It is curious, I think, that the insurance industry continues to underwrite, in a pretty unabashed way, coverage that has no actuarial content.

If you will pardon my diatribe, what has this to do with "Market Practices"? It is the basis by which we all must contend in the daily professional watch of our client base. The next few years will possibly see a dramatic change in how business is brokered, underwritten, and viewed by not only the underwriting fraternity, but by the broker/agent and especially the client.

There could well be a paradigm in the making. In fact, there already has been one during the past couple of years, where the excess marketplace has seen a fair amount of the so-called surplus lines marketplace replaced by standard markets. This marketplace will have a difficult time continuing to be one of market share, with the philosophical thought process that there are virtually unlimited dollars to be provided in the capital marketplace just for the asking. At some point, the marketplace is going to need to reassess underwriting values and take a hard look at what can be underwritten, and what needs to be handled on an entirely different methodology. This excludes the supposition that the federal government will step in and take over risk that they are neither qualified to handle, nor should.

Assuming that this occurs, the broker/agent community needs to have already thought out for their client base those risks which may or may not be insurable, irrespective of cost or retention. I have the feeling that the next 5 years or so will necessitate thinking outside the box, on covers which hereto may have been "standard or normal." Professionalism, real knowledge of risk, ability to articulate the client's needs and expectations, alternative methods of providing coverage and comfort, and the keen sense of being able to negotiate will carry the day.

Don't for one minute believe it isn't going to happen. It will, and perhaps sooner than any of us believes.

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