The world is still in a state of financial flux. Yet during a period in which a couple of well known insurers (Kemper; Atlantic Mutual) finally hit insolvency and the biggest name of all, AIG, had to be bailed out by the US Government, the insurance market is in some ways actually surprisingly stable.
Not that the carriers necessarily like it – despite the general financial turmoil, the insurance soft market is continuing, and some industry insiders wonder whether it’s here to stay. Even conservative predictions think that the soft market will continue for two to three more years.
Worldwide interest rates are still at all-time lows, and the financial markets need to invest in something with a good rate of return. For some time the large financial markets have seen the insurance industry as a safe bet with stable profits. So they are pumping money into insurance companies and as a result the insurance industry’s policyholder surplus is at a record high.
Policyholder surplus is one of the measures of an insurer’s financial health, and one of the benchmarks that control the insurance market. Put (very) simply, regulations control the ratio between an insurer’s assets and the total value of insurance it is allowed to write. When an insurer has a large surplus, it can write more insurance. When the entire industry has a large surplus, supply outweighs demand, and a soft market develops.
This has also been fueled by the downturn in the business climate. There are fewer insureds being courted by an increased number of carriers needing to write more insurance. Because supply is high and demand is low, premiums get cheaper. In previous soft markets, this condition has self regulated over time – lower premiums lead to smaller profits, investment income slows down, capacity is reduced, and premiums rise. And so the cycle reverses. However, policyholder surplus has now been rising steadily since the early 1990s and shows no sign of stopping. That means that the market is staying soft, probably for a long time to come. You should note that of course an individual insured’s claims history and each sector’s overall claims experience will still affect premiums to a degree.
A recent report from the Council of Insurance Agents & Brokers notes that renewal premium rates declined on average 5.2% in the third quarter of the year, compared with a 6.2% decline in the second quarter. The decline in renewal premium rates has hovered around the 5% marks since the middle of 2009.
Helping sustain the soft market is that this year has seen a lower than average number of US weather related catastrophes – traditionally an area of significant losses. There is now so much surplus that some reinsurers think it will take a big bang event (a $50 billion or greater loss) to reverse the soft market. Reinsurance rates are expected to continue to drift downward unless (or until) that big bang event occurs.
The winners of this scenario are the insureds, especially those with good risk management programs and good claims records. Generally speaking, premiums are so low that they are probably cannot go down much more – some sectors are at extreme lows. But insureds still have a very strong bargaining position for other benefits – claims handling agreements; additional coverages; risk management partnerships, etc. Carriers need to find a way to differentiate their product from that of the competition and so they are willing to compete on terms and conditions, as well as price. It’s definitely a buyer’s market, and so insureds can pick and choose who they want as their insurance and risk management partners.
But a word of warning for insureds: this glut of surplus itself carries risk. Enabled by large amounts of surplus and trying to make profits despite lower premium and fewer accounts written, some carriers are retaining more of the risks they underwrite instead of laying it off to reinsurance. A significant loss could wipe out such a carrier. So choose your insurer carefully, and don’t be afraid to do some research on a prospective insurer’s financial health, marketing and underwriting philosophies, etc.
And of course, there are exceptions to every rule. In particular, not all is well with Worker’s Compensation insurance in California. In part because of the weak job market, some workers are staying on compensation benefits longer. This is because there are fewer opportunities for injured workers to move to less demanding jobs. With unemployment high and fewer jobs in the state, the carriers are taking in less premium money. Medical costs continue their inexorable upwards march, and as a result Workers Compensation rates are starting to rise once again.