Canadian Underwriter
Feature

Goodbye, Hard Market..?


July 1, 2004   by Sean van Zyl, Managing Editor


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The first quarter financial results for U.S. insurers appears to confirm what many in the North American property and casualty insurance industry have come to suspect: that the pricing momentum of the “hard market” is rapidly disappearing like a wisp of smoke from a departing steamboat – leaving insurance companies standing forlorn on the dock. As Robert Hartwig, chief economist at the Insurance Information Institute (III), observes, “…pricing seems to be weakening more rapidly than anyone anticipated”.

Although Canadian insurers were able to notch up a respectable 27% annual growth in net written premiums for the first quarter of this year – thus suggesting that upward pricing momentum remains strong – company CEOs seem less than confident that such rate increases can be maintained (see coverage of the Canadian Insurance Congress in this issue for further details). In fact, the mandatory auto product, which accounts for nearly 50% of total premiums, will face rate reductions during the second half of this year and going into 2005 as the various provincial reform measures and political demands for rate reductions take hold.

Of particular note is the significant year-on-year drop in Canadian reinsurance premium growth over 2003, as reported by the Reinsurance Research Council (RRC). The RRC industry data indicates that net written premium volume grew by about 4.5% over the course of 2003, significantly lagging the 20%-plus gain made by primary companies over the same period.

Reinsurers suggest, however, that the stale growth in premiums is not due to reduction in pricing – although CEOs admit that rates in many classes of business more than likely hit a threshold at the last renewal round. Reinsurers contend that the modest premium growth has more to do with higher primary retentions as companies look to capitalize on the hard market (see cover article of this issue for further details). Reinsurers also note that growth in net written premium is less accurate an analysis measure of pricing and business volume ceded as this does not reflect business passed on to the retrocession market. But, even assumed premiums, as reported by the RRC, for 2003 show less than a stellar annual growth rate at around 6%. Are reinsurers trying to “talk themselves” into believing pricing discipline will be maintained? Clearly the pricing direction taken by the reinsurance sector in the upcoming renewal season will have significant impact on how primary companies react to the marketplace.

Although the Canadian p&c insurance numbers that are currently available provide a cloudy view of the pricing direction of the marketplace, what cannot be ignored are trends developing south of the border. U.S. reinsurance gross written premiums for the first quarter of this year came in 7% lower than the same period in 2003, while primary results for the first quarter of 2004 show a sharp year-on-year drop in written premium growth of 4.5% compared with an annual growth rate of 12.7% recorded at the end of March last year.

To quote the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI) from a joint statement released with the first quarter primary industry results, the decline in premium growth occurred “amid signs of intensifying competition in insurance markets”. This increased competition could undermine the industry’s profitability in going forward, observes John Kollar, the ISO’s vice president of consulting & research. “Written premium growth peaked at 16.8% in the third quarter of 2002 and has since dwindled to less than a third of that.” The conclusion Kollar draws to is whether the financial recovery achieved by insurers over the past year can be sustained (see MarketWatch of this issue for further details).

Hartwig shares the view that the “good times” of the hard market may be coming to a close. “With insurers hitting price, profit and underwriting targets more quickly than they expected, the market has turned price-competitive sooner than would otherwise be the case. Justified or not, the combination of rising inflation and slower premium growth could plunge the industry into a negative real growth situation by late this year or early 2005 for the first time since 1999.”

Can the Canadian marketplace buck the “North American trend”? Even without the implication of price softening already setting into the reinsurance sector, past experience proves that the “soft belly” of the industry lies in the almost superstitious belief in that beast of all beasts – the insurance cycle. Even though common sense might dictate adherence to underwriting discipline, in price and terms, no company wants to be seen as the ‘last out of their chair” as each eyes out the competition with the belief that the other will take the charge for marketshare. Have insurers bid farewell to the hard market? The numbers definitely suggest that its bags are packed ready for departure.


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