When Will the High-Priced Insurance Market End?

In a recent report, the Consumer Federation of America said its research has determined that the end of the high- priced hard market is at hand for commercial insurance.

The CFA, a Washington, D.C.-based non-profit association of some 300 consumer groups, said that with commercial insurance loss ratios falling sharply and with rate hikes slowing over four consecutive quarters, the two trends indicate the hard market's end is months away.

"I have been through this thing twice before, and basically, the hard market is now over," said J. Robert Hunter, director of insurance for the group. "Generally, the property hard market will be all over by the middle of this year, and the liability will follow about a quarter later," Mr. Hunter told National Underwriter.

For those who feel he may be overstating his case, Mr. Hunter argued: "If insurers say I am daydreaming, it's because they want to keep the prices going up, which means more profits for them. They have every incentive to say it."

"The hard part of the cycle is over. And insurers don't need more surplus-they've already got plenty compared to historical levels."

John Iten, director at Standard & Poors Ratings Services in New York, is skeptical. "I would agree that there has been a leveling-off of premium rates in property. But calling this the end of the hard market is still premature."

There is still a lot of balance-sheet repair work that needs to be done, which makes it difficult for insurers to try to expand their market share with more competitive pricing. "We don't see the end of the hard market-not this year and not likely in 2004. What this [CFA] report is saying is certainly not what we are hearing from the companies," Mr. Iten said.

"The bottom line is that there are still reasons for insurers to keep the hard market," added Laline Carvalho, another S&P analyst. She said she is still seeing a barrage of reserve strengthening, and that if companies want to achieve better returns-above the paltry 1.0 percent return for the industry last year-the hard market won't end anytime soon.

"There are still increases in liability, and rates for property are flattening out, but at a profitable level," she said.

Sarah Hibler, analyst at New York-based Moody's Investors Service, agreed that casualty rates still need to rise further, although property rates would stabilize. "Certainly in some lines the rate increases have peaked, and in some lines rates will rise at a slower rate," she said.

But it's difficult to imagine rates declining much because commercial lines insurers still have reserve deficiency problems. It's possible that the pricing has peaked, but factors such as reserve deficiencies, low interest rates and the volatile stock market favor the continuation of the hard market, Ms. Hibler argued.

Others, like MarketScout, an online insurance exchange based in Dallas, offered a somewhat different take on CFA's conclusion, saying that this time around, the hard market could linger on selectively, based on the quality of accounts.

"In past years, insurers would generally raise or lower rates across the board. But insurers are now doing much more account-specific underwriting," said Richard Kerr, chairman and chief executive officer at MarketScout. "What's taking place is that underwriters are now becoming smarter in that they are appropriating rate increases to those with poor management. If you have a good, quality account, you could see rate decreases," Mr. Kerr said.