Editors' Cuts

Malaise Forever

Bill Kenealy
Insurance Experts' Forum, November 14, 2011

With Italy’s sovereign debt woes portending another global economic meltdown, I am reminded why economics is called the dismal science.

I’ll wager that insurers must get a similar sense of foreboding when reviewing the latest commercial lines’ pricing data, which is rather dismal. New numbers from the Council of Insurance Agents & Brokers’ Fourth Quarter Commercial P/C Market Index Survey shows the soft market persisting as commercial lines renewal pricing on average declined 5.4 percent in the fourth quarter of 2010. Moreover, new data from The Risk Management Society reveals that even the cavalcade of catastrophic loss events in the first half of 2011 were not sufficient to dislodge the soft market. Thus, excepting a Katrina-sized cataclysm, the soft market is likely to linger.

While you can’t discount the macroeconomic impact on the numbers, bear in mind that soft markets are the ultimate result of a collective lack of underwriting discipline. CIAB President Ken Crerar puts it bluntly. “We didn’t see any strong resolve by insurers to hold the line on pricing last quarter,” he says “The fundamentals don’t add up, but competition still rules the day.”

This fundamental disconnect—aggressively pricing to retain business and market share but ultimately collecting premiums insufficient to cover claims that may occur—means that insurers are effectively eating their seed corn. So are insurers doomed to a Sisyphean cycle of self-destructive, zero-sum competition or is there a viable exit strategy?

Recently in Chicago at the Association of Lloyd’s Brokers Annual Luncheon, keynote speaker, Aon Corporation founder and retired executive chairman Patrick Ryan noted that hard markets are getting shorter in duration and recommended that insurers accept, if not embrace, soft market dynamics. “We have to learn to work innovatively and be able to grow in a soft market.”

Part of this, Ryan contends, is identifying new risks while eschewing commoditized, cutthroat lines. This is strategy he has employed at his new firm, Ryan Specialty Group. “The specialties in our business are where the money is,” he said.

To price these risks, Ryan said he puts a premium on hiring creative people. “If you build your business around differentiating talent good things will happen.”

Indeed, considering the seemingly unshakable malaise surrounding industry pricing and the economy as a whole, a little introspection during these times may not be such a bad thing.

Bill Kenealy is a senior editor for Insurance Networking News.

Readers are encouraged to respond to Bill by using the “Add Your Comments” box below. He also can be reached at william.kenealy@sourcemedia.com.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

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