Insurance marketplace for 1998
Clapp, Wallace L Jr
“The year 1998 in the property/casualty marketplace looks like a carbon copy of 1997, according to specialty managing general agents we have contacted. There is just too much capacity in the market-both in the standard market and the specialty market-where participants are competing against each other for business traditionally written in the specialty market. The overabundance of capacity in the nonadmitted market continues to drive rates downward, even when the admitted market has not taken the business.
Third-quarter results from the Insurance Services Office and the National Association of Independent Insurers serve as an example of improved conditions in the marketplace which fortunately got through 1997 without any major catastrophic occurrences. Even this winter so far has not been as severe in most sections of the U.S., except in Northern New England where direct property losses do not appear to be as great as projected business interruption losses.
Net income after taxes has been estimated for the third quarter at $8.3 billion, more than 60% better than last year’s level. The total of the net income for the first nine months was $26.4 billion, an increase of 55.8% over last year. The combined loss and expense ratio for the third quarter was 102%, the lowest ratio since 1988. The combined ratio for three-quarters is estimated at 101.2%, nearly five points lower than last year’s figure. In fact, 1997 threequarter year ratio is the best since the 100.6% posted in 1979.
According to Sean Mooney, chief economist for the Insurance Information Institute, the 1997 rate of return on investment is the strongest for the insurance industry in 10 years. Even though the return on equity is high, some analysts caution that some insurers may be wearing thin on previously built-up loss reserves.
Despite the softness of the market, property/casualty net written premiums rose to $210.4 billion from $203.1 billion last year. The net underwriting loss gained to $4.5 billion from $13.3 billion last year. Net investment income rose to $30.9 billion from $27.4 billion. This increased consolidated surplus to $296.4 billion, topping last year’s $242.5 billion.
For all casualty business, rates have continued to drop anywhere between 10% and 25%. Larger accounts are receiving some rate cuts of as much as 50%. Excess and umbrella rates in the surplus line market seem to be the strongest hit on rate cuts. Product liability risks are being cut in the specialty market, if the standard market hasn’t grabbed the business first.
Umbrella and excess coverage in the specialty market is a good buy due to the softer rates and the additional capacity available and better terms and conditions than in past renewal periods. Pollution coverage is available to large accounts through the use of standard pollution endorsements available from the ISO.
Primary markets are willing to add extra features to their CGL policies including E&O and employment practices liability (EPLI) in order to attract business.
Terms and conditions have been liberalized for most directors and officers liability policies, and E,PLI is being added for a slight charge to attract policyholders.
The only tight market appears to be general liability for home builders. This is largely occurring in California but appears to be spreading eastward.
Property insurance rates also are falling, particularly for the catastrophic risks of earthquake and windstorm on the West and East Coasts. Because of lower losses and increased capacity, earthquake underwriters are lowering new rates by up to 15% and even higher for large accounts. However, rates are still much higher than when the earthquake hit in Northridge, California, in 1994. Finding coverage for many agents may be difficult, though, because many insureds cannot generate the $20,000 minimum premium that insurers are asking.
Windstorm premiums in Florida and elsewhere on the Atlantic and Gulf coasts are going down, largely because of new capacity and the predictions that El Nino will produce climatic changes that would lead to a light hurricane season this year. Deductibles are being shaved for both earthquake and hurricane exposures.
Insurers say that the biggest problem exposure they are facing in the future is the year 2000 computer problem. Biggest exposure in this area appears to be D&O and E&O claims.
Hottest buy for 1998 still is employment practices liability insurance. More insurers have entered the market, and rates have decreased because of this greater capacity. Limits of liability are up and the coverage is being added to D&O and E&O policies at very low additional charges.
Environmental coverages, particularly for contractors and consultants, are more abundant and markets are getting stronger. New capacity is available even for the jumbo accounts. The market is still top-heavy with three insurers controlling more than 75% of the market, but other insurers are lining up for a portion of the remainder of the market.
Miscellaneous professional liability is very competitive because of a number of new insurers entering the marketplace. The non-medical professional liability market is particularly active because of so many different types of businesses that have professional liability exposure. Lower minimum premiums allow greater opportunities for insureds to purchase this coverage.
The complex world of cyberspace and Internet exposures is currently being explored by the insurance market. Some companies have developed programs to cover the liability exposure of companies that develop Web sites, operate Web sites and sponsor chat boxes for Web users. Continued efforts on the part of the U.S. government have not offered any solution to regulation of the Internet, particularly with regard to its worldwide exposure. As yet no standards of protocol on the Web have been worked out.
Some problems that have yet to be solved at the beginning of 1998 and that can be expected to around by year-end are:
…How to deal with the retroactive liability of Superfund cleanup.
The insurance industry will not deal with this problem without some help from business and the government. No meaningful legislation appears to be in the offing, but many have claimed that the exposure is not as great as once feared because many of the top sites are now being cleaned up or reevaluated.
…The emerging problem of Y2K (year 2000) liabilities.
This looms as a very potential computer catastrophe, and time is running out to solve problems. The year 2000 problem faces all computer hardware, software and chips that use a two-digit date code, 97, instead of 1997. If the computers are not replaced or fixed they will read 00 rather than 2000. If that happens the computer will malfunction. The effect will be felt in all PCs, mainframes and even chips imbedded in elevators, other electronic devices, and even automobiles.
There is currently no law dealing with the liability problem of computer breakdown because of Y2K. Is the manufacturer of the equipment liable? Also, insurers and businesses that have hired consultants to advise of the millennium bug will want to know whether the consultants knew about the problem when they rendered advice about computer hardware and software, and to what extent their liability would be if they had known. Insurers themselves are prone to serious exposure to the Y2K problem because their computers will be outdated and they will have many policyholders with similar problems. Is the year 2000 problem covered by standard policies? Many insurers feel that this will be true, because they are designing endorsements to avoid year 2000 liability.
…How will increased acquisition and merger activity affect the E&S market?
From the insured’s viewpoint, will increased power in the hands of fewer players off-set the benefits of the economies of scale of a larger insurer organization? Will super large brokerage houses, e.g., Johnson & Higgins/Marsh & McLennan and Aon Corp. brokerage, offer the same level of service to policyholders? If the large super brokers neglect the smaller accounts, will not regional brokers have a greater opportunity to pick up these neglected insureds?
…Will Lloyd’s continue its profitable climb into the late 1990s?
Signs of an increase in profits for the underwriting year 1994 concluded in 1997 showed profits at $1.88 billion, more than four times greater than the previous accounting. Healthy predictions are forecast for 1995 and 1996 years also. Much of this is due to the R & R program put into effect by Lloyd’s and its ability to fund Equitas, which took over all pre1993 liabilities. Will Lloyd’s again be able to expand its writings in the nonadmitted market in the U. S.? Will it start to write casualty lines on a large scale? Will the surplus lines brokers in the U.S. need Lloyd’s capacity?
We conducted an informal survey among several brokers and managing general agents to get their feelings about the condition of the marketplace in 1998.
For supplying us with answers to our survey questions, we owe a debt of thanks to Chuck Deering, CPCU, Deering & Associates, Durham, North Carolina; Fred Wootan, CPCU, Miami Valley Excess & Surplus Agency, Miamisburg, Ohio; and David L. Geary, CPCU, RISC, Inc., Dallas, Texas.
1. How are you planning to take advantage of your role as an innovator and ability to transact business in the surplus and specialty markets to offset standard market companies who continue to add new business?
Specialty brokers are planning to take advantage of their role in the marketplace by identifying areas of the market that have the least amount of competition. One general agent plans to focus more on providing insurance products to small and rural agents who are unable to maintain contracts with standard markets. Another example is the managing general agent that is looking for new insurance products that the standard market is still unsure about writing. It is also important to keep the general agent’s customers aware of their need to keep the more difficult business out of their standard markets to protect their contingencies.
2. Are your specialty and U.S. companies providing adequate capacity for your office to handle all business being admitted? Are any specific coverages still difficult to place?
Adequate capacity is available from specialty carriers. Lines that are still difficult to place include transportation risks, large energy accounts, particularly those with marine exposure, habitational property, products liability, seacoast property.
3. What classes of risks are you seeing most frequently?
Classes that often are most frequently submitted to our MGA correspondents are logging and transportation risks, pawn shops, day care centers and restaurant risks. Another MGA sees a number of risks in the professional liability and pollution exposure areas. Large corporate downsizing has caused a number of new entrepreneur accounts to emerge. The bulk of the managing general agents sees the same business of general liability, distressed property, such as vacant buildings, habitational risks and bars and restaurants.
4. Has your office taken advantage of the numerous programs offered by standard and specialty markets to increase business? What new programs are you planning to add?
One agency has added several classes of professional liability and employment practices liability standalone coverage for 1998. A second office is adding a “slot rated” OL&T program providing the opportunity for retail producers to quote premiums in their offices with the binding authority the responsibility of the MGA. A liquor liability program is being added by that agency also. Another office is adding on umbrella facilities, habitational liability and pest control program.
5. Do you plan to increase your submissions to Lloyd’s? What lines would you like to see Lloyd’s write that they are not writing now?
One agency is already submitting more business to Lloyd’s. They would like to see more competitive property and auto liability writing coming from Lloyd’s. Another program submitted by another agency is an OL&T facility and a vacancy program that includes premises liability.
6. Have you created or are you planning to create a home page on the Internet? If so, what advantage do you feel you will have over other brokers that do not plan this?
Having a home page would allow specialty brokers to tap a segment of the market that has been unavailable in the past. It would also provide national exposure at a minimal cost. As wholesalers, our correspondents don’t see the immediacy of establishing a home page, but such a vehicle could be of a great advantage to promote the agency’s name and products and what it does in the marketplace. In addition, it could provide for the e-mail of applications and information about the various facilities of the wholesaler.
7. How will regulations enacted or ruled on by regulators and legislators related to the excess and surplus lines industry affect the market in your state and others in which you do business?
One office feels that open rating and deregulation of insurance will greatly hamper the surplus lines industry. The laws in most states have been relatively stable for the past year. The changes being added in some states do not appear to have any
immediate impact on the industry.
There is a concerted effort on the part of both the American Association of Managing General Agents and the National Association of Professional Surplus Lines Offices to monitor legislation in every state and report any unfavorable legislation or rulings to the specialty companies and brokers in the affected state. Sometimes action by the industry can bring about more effective laws than were originally proposed through conference and consultation with state insurance commissioners or legislative bodies.
8. How have mergers and acquisitions of leading specialty brokers and specialty companies affected your office?
One agency reports that some merger activity with their markets has improved its product lines. Another agency seems unaffected but reports that the efficiency that is gained by a merger justifies offering more attractive or competitive insurance products, notwithstanding the benefit of improved financial stability produced by the merger.
Whenever possible it is desirable to become a stockholder of the firm’s major carriers to share in their success and enjoy the possible investment opportunities should a merger or acquisition occur, says one general agent.
One specialty broker believes that merger and acquisition activity will be very destructive to the mediumsized independent broker. Fewer agents means less business, and national agents will have their own facilities to compete with specialty brokers.
9. What are your predictions for writing an increased volume of business in 1998? What do you feel are the hottest new markets in the specialty and nonadmitted lines arena?
Most wholesalers are predicting that they will be staying even or increasing by 10% to 15% in 1998. One office sees more standard companies appointing surplus lines brokers and general agents to distribute their products. Another wholesaler sees increased growth brought about by redirecting its focus and refinement of its organizational structure. The only way to achieve substantial growth in 1998 is through new territories and new product lines, particularly in the areas of professional liability, pollution and employment practices liability areas.
EPLI, high-tech industry, E&O and miscellaneous professional liability continue to produce a lot of activity, but often wholesalers”‘ “hit ratios” are low (many shoppers but too few buyers).
Copyright Rough Notes Co., Inc. Mar 1998
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