A funny thing happend on the way to the hard market: Willis report

A funny thing has happened on the way to the much-anticipated hard insurance market in the United States — ongoing rate competition, says the Spring 2009 edition of Willis Marketplace Realities.
“If the financial crisis of 2008 was a Category 5 storm, the impact on the insurance marketplace has been closer to Category 1 intensity,” the Willis report observes. “This result is all the more surprising given that the devastation in the financial sector was only one part of what seemed to be a perfect insurance industry storm: not only did investment income nosedive, but premium rates were depressed by a long soft market, reinsurance costs were starting to climb at 1/1 renewals and the world was absorbing enormous losses from a more familiar source: natural catastrophes (i.e. Ike, Gustav, etc.”
So, given all of the above conditions, it seemed likely a hard market, featuring higher premiums and stricter underwriting criteria, would be inevitable.
“Yet the rate increases many of us expected are not there,” Willis observes. “Why?”
Willis offers three key drivers underpinning ongoing soft rates in the commercial insurance market.
•    The industry remains well capitalized, despite poor returns in 2008, because of the record surpluses in 2006-07.
•    The marketplace offers few impediments to new entrants, with the result being many newcomers. “Given the uncertainty of most investments, insurance is an especially appealing place to commit capital,” Willis notes.
•    Competition with American International Group, which has received more than US$150 billion in bailout money from the United States Treasury to keep the insurer afloat while it sells off assets.
“Not only is AIG under intense pressure to keep business, but competitors seem overly focused, sometimes intensely so, on the possibility of wresting business away from the market leader,” the Willis report says.