A Market in Flux: Insurers at RIMS Discuss the New World The

Insurance companies are finding their sea legs in a different kind of market, the likes of which they've never seen before.

In spite of heavy catastrophe claims from 2008 and the worst financial results in years, insurers are not seeing the market take its usual dramatic hard turn, executives said during interviews at the Risk and Insurance Management Society's annual conference, which was held April 19 to 23 in Orlando, Fla.

"It's a different market for a different time," said Thomas A. Lawson, executive vice president of FM Global. "It's the first time the industry has had issues with results combined with a financial crisis."

The market is trying to harden, but there are not clear indications across a range of products that it is occurring, said Dave Duclos, executive vice president and chief executive of XL Insurance, the insurance operations of XL Capital.

With the exception of some property insurance and directors and officers liability rates -- which were impacted by recent stress on financial institutions -- most buyers found commercial insurance premiums flat or down slightly for most North American businesses in the first quarter, according to a RIMS survey.

Also, with the economic downturn reducing the demand for insurance, insurers have seem competition for some business increasing. "Premiums are down because of macroeconomics and competitive pressure, which makes for a challenging environment," Duclos said.

The state of the market and the global economic downturn were hot topics at RIMS this year. Most seemed to agree on why the market was different, but few crystal balls showed when or if the market would take a hard turn.

"We think the supply and demand dynamics for capital in the insurance industry are a little out of balance given that: year on year, the industry has reported a 96% drop in net income; a variety cat events over the last 12 months have drained capital out of the industry; and a lot of balance sheet and investment portfolio events have drained capital out of the industry. We believe, in a perfect world, in the Adam Smith, supply-and-demand world, that capital should be worth more," said W. Gordon Knight, president of Allied World U.S., said during an interview.

Mike Foley, chief executive officer of Zurich North America Commercial, said the market is "at a point of uncertainty and transition."

"It's a time where basically the market has a decision," Foley said during an interview at RIMS. "In historical hard markets, we?ve gone one to two years further, and at that point, we have to take sharp price increases to make up for the lagging economics that hit us. If we actually pro-actively address it ...we can describe to clients that ...we need to get higher returns on our underwriting results and really go back to fundamentals and making sure that we are earning underwriting profits on the risks that we take on our balance sheets."

Nikolaj Beck, managing director and head of Swiss Re's commercial insurance operations IRI Global Industry Practices, said the company expects to "see a hardening more towards the end of 2009."

While insurance companies talk about focusing on underwriting discipline and making profits from underwriting not from investments, "If everybody did what everyone is saying they are doing, we should have a hard market. But there are question marks around it," Beck said.

"While there's a lot of talk about the hardening, we haven?t seen it broadly, we certainly haven?t felt it broadly," said Bob Petrilli, managing director and head of IRI Americas. "But it?s inevitable."

Mario Vitale, CEO of Zurich North America, said the slow turning of the market is a sign that the legendary insurance cycle, with its steep peaks and valleys, may be smoothing out.

"It?s not an overreaction (to pricing)," Vitale said. "That is good for everyone. It?s good for customers, it?s good for brokers, it?s good for insurance companies. It?s more responsible reaction."

"I've been in business now for over 30 years, so it?s hard for me to believe that the cycles will ever disappear. I like to believe they will be smoother, I like to think they are going to be a little more predictable and the swings won?t be as wild," Vitale said.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)