Why this P&C consultant is not convinced we’re in a hard market
January 21, 2020 by Jason Contant
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Hard markets and “difficult” markets are two different things, and one property and casualty insurance industry consultant is not convinced we’re in a hard market.
Phil Cook, P&C consultant and chairman of Omega Insurance Holdings Inc., speaking at the Insurance Institute of Canada’s Industry Trends & Predictions: 2020 event.
“Almost universally, people are talking about us being at the beginning of a hard market or being in a hard market,” said Phil Cook, a veteran P&C industry consultant, at the Insurance Institute of Canada’s Industry Trends & Predictions: 2020 breakfast in downtown Toronto. The chairman of Omega Insurance Holdings Inc. has been in the Canadian insurance marketplace since 1967.
“Hard markets are really only properly identified with benefit of hindsight,” he said. “It’s very difficult to say in the first year of a hard market that you’re in a hard market, because it only really becomes apparent after one, two, or three years that this is the beginning of a hard market. By 2022…we can look back and say, ‘Yes, it was a hard market.’”
But right now, it’s still too early to tell, Cook observed Thursday.
“Is it a hard market or is it just a difficult market?” he said. “My personal opinion right now is that it’s a difficult market and it may well just be a correction in a market cycle.”
Hard and soft markets are not the same as market cycles, Cook said in his presentation. The industry is always in the middle of market cycles, which tend to last about three to five years in North America. There’s no middle ground in market cycles – they are going one way or another.
Hard and soft markets are very, very different, he said. “We tend to think of hard and soft markets the same way as we do market cycles, in that as soon as the hard market is over, we’re in a soft market. Or while we’re in a soft market, and it changes, we’re immediately in a hard market. That is absolutely not the case,” Cook said, noting there are extensive periods in between hard and soft markets when it’s just a regular, or (relatively) stable, market.
Throughout his time in the industry, since 1967, Cook has seen only three hard markets: one from 1975-78, another from 1984-87 and the last from 2001-04.
Cook acknowledged that many in the industry would beg to differ. Several reports are available by brokers and insurers that discuss increased rates and withdrawn capacity in personal lines home and auto, and scattered capacity withdrawals and rate increases in commercial lines.
“Why does he think the industry is not in a hard market?” Cook asked rhetorically, explaining his iconoclastic view. “Combined ratios leading up to the last hard market in 2001 were 105.9% in 1999, 108.7% in 2000 and 111% in 2001,” Cook said. “Three years in a row of massively increasing 100+ combined ratios.”
Also, return on equity (ROE), a measure of insurers’ profitability, was tanking. ROE was 6.3% in 2000, 2.6% in 2001 and 1.7% in 2002.
By comparison, the combined ratios for the industry stood at 96.6% in 2017 and 98.6% in 2018. P&C results for 2019 are not in yet, but extrapolating based on third-quarter actual results (99.93% combined ratio), “it’s almost certain that we will have a combined ratio in excess of 100; most likely in the 102-103% range,” Cook said.
Likewise, if you look at ROE, it was 7.3% in 2017, 4.6% in 2018, and it’s projected to be about 4.3% in 2019. So while the current market “has similar attributes, it has nowhere near the severity of the previous ones,” Cook said.
Other components that typify a hard market include:
- Sustained rate increases, which would need to happen in 2020 and 2021 for this to be a hard market, Cook said.
- Reduced capacity – “Not only did [insurers] apply more discipline to existing lines of business, they tend to cover off non-core business,” Cook said. “Where we are seeing [reduced capacity], it could just be a normal reaction to a market cycle change.”
- Increased reinsurance costs – The most recent reinsurance renewal season was “relatively benign, even with the Cat losses,” Cook said. “Again, it doesn’t indicate this is the beginning of a hard market. Reinsurance costs would have to start escalating significantly.” In 2001-04, there were about 180 new corporate captives set up in Bermuda alone.
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Definitions of Hard & Soft
Markets for none Insurance readers….. Just……because:
Hard and Soft Markets
A hard insurance market is characterized by a high demand for insurance coverage and a reduced supply. Insurers impose strict underwriting standards and issue a limited number of policies. … When the market is soft many insurers are competing for business and premiums are generally low..
A very interesting article and comments by one of the senior statesmen in our industry. I agree with Mr. Cook.
To be clear, the past year (2019) saw only a correction in commercial rates; a catch up after fully ten years of flat or declining pricing depending on class. These were the 20% increases that brokers had to explain and clients have been asked to accept. The arguments make sense. In 2019, clients were asked to pay current rates for coverage that are fair from a material perspective, and they still have the savings from the past decade in their pockets.
As we move into 2020 and then to 2021 we will see how this plays out. With a correction to what should now be profitable results, will carriers risk losing good business to competitors by continuing to increase rates across the board (a hard market stance)? Or will carriers flatten the increases for their best clients? Or, even, will some carriers start to reduce rates to increase market share in what they perceive to be profitable classes? What? Again? Really?
What I do like is a return to sanity from companies in general in terms of capacity offered on a per risk basis. Subscription formats on large commercial properties provide spread of risk to carriers and hence better overall results. Why write one 100 million dollar building when you could write four similar buildings and provide a 25% line on each? By the way, this is also an argument against the future viability of brokers with few contracted carriers or limited market relationships………….scary for some! Lost any clients due to a lack of capacity? This will get worse, not better in my opinion.
Carriers would do well to consider the reasons for particular and current areas of unprofitability and how they found themselves there. And, consider that there are always bad risks, but there are really no bad classes. Let’s all agree that poor risks should be avoided (especially if they do nothing to help themselves); but so-called bad classes are not as they seem. These are simply classes that have not been charged enough premium. And we all know how that happens. And it will happen again.
If rates in currently unprofitable classes do continue to increase through 2020 and beyond, again this still is not a hard market condition.
Rather, it is merely an extended journey in search of needed rate correction. Carriers do need to ensure that they don’t subsidize such classes by increasing rates in other areas either to compensate. They will lose their best clients in those other classes in 2021 due to a better pricing or coverage offering.
And that last will really and truly end any semblance of a hard market, will it not?
I invite Mr. Cook to spend any time with brokers in the real estate space and then confirm that we are not in a hard market. Increases of anywhere from 30-800%, deductible increases to $750,000 and inability to secure coverage of any sort is becoming the norm within the industry. Yes, many industries are seeing market correction rather than hard market circumstances but those who are in real estate, recycling, aviation and roofing are seeing the hardest market many have ever seen.