January 21, 2020 by Jason Contant
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.
“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 Several reports are available by brokers and insurers that discuss increased rates and withdrawn capacity in personal lines home and auto, and scattered capacity withdrawals and rate increases in commercial lines.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: