Hard market is coming and may be prolonged, Advisen says

The deteriorating global economy could delay the hardening of the commercial insurance market until the end of this year, but the coming hard market may be more prolonged than past cycles, Advisen Ltd. predicts.
Average rate levels for commercial insurance will level off by 2009 Q2 and will begin to creep higher beginning in 2009 Q4 or 2010 Q1, Advisen says in its report, The Hard Market is Coming (But Don’t Hold Your Breath).
Deepening global recession may delay the return of hard market conditions by suppressing demand for insurance, it continues.
As companies downsize, the demand for insurance not only decreases, it decreases at a rate faster than the contraction of the overall economy, David Bradford, co-founder of Advisen, wrote in the report.
Although going without insurance is not an option for most companies, many will look for ways to decrease insurance costs. This may be done through raising retentions and the use of captives or other alternative risk-financing mechanisms.
“More companies will gravitate towards low-cost providers, even if it is necessary to loosen financial security criteria,” Bradford wrote.
While these are typical hard market responses, it’s likely companies will resort to them as they are “squeezed” by a deteriorating economy.
Advisen forecasts a “soft landing” for the soft market in 2009 Q4 because, in the absence of large catastrophes, underwriting losses and poor investment returns will exert upward pressure on pricing.
Typically, rising premiums attract new capacity to the insurance market, which increases competition and eventually chokes the hard market, the report says.
“In the current economic environment, however, skittish investors, dysfunctional credit markets and de-leveraged hedge funds may mean that much less capital will be available to fund new insurance and reinsurance companies or investments in alternative sources of capacity,” the report continues.
“As a result, the coming hard market may last longer than has been typical in past cycles.”