Seven Signs the Market is Hardening
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FORE FRONT; Pg. 11 Vol. 56 No. 5 ISSN: 0035-5593
Seven Signs the Market is Hardening
Rick Stasi is the chief operating officer ofAvizent.
There is much debate over whether or not the insurance market is hardening. Some believe it has yet to see the rising prices and decreased capacity indicative of a hardening market. They note that some carriers are trying to gain market share by lowering price. Here are seven signs that the market is hardening: 1. lower underwriting profits, 2. increased combined ratio, 3. lack of investment income, 4. increased catastrophic losses, 5. return on equity falling, 6. reinsurance hardening, and 7. reductions/capacity. FULL TEXT
There is much debate over whether or not the insurance market is hardening. Some believe it has yet to see the rising prices and decreased capacity indicative of a hardening market. They note that some carriers are trying to gain market share by lowering price. So, is a hard market coming? Looking at the general indicators of a hard market helps answer the question - especially considering every factor trends negatively.
1. Lower Underwriting Profits
In 2007 and 2008, the market saw negative premium growth for the first time since 1943.
2. Increased Combined Ratio
In 2007, the combined ratio (losses in claims plus overhead divided by premiums) for the insurance industry was 94%, which increased to 106% in 2008. (A combined ratio over 100% is unprofitable for insurers. The 1 06% ratio means insurers were paying out $106 dollars for every $100 of premium collected).
3. Lack of Investment Income
The industry can no longer make up for unprofitable under- writing through investments. Investment gains were off sharply in 2008 due to lower yields and poor equity market conditions.
4. Increased Catastrophic Losses
In 2008, there was $25 billion in estimated catastrophic losses - worse than 2006 and 2007 combined.
5. Return on Equity Falling
ROE is close to record lows. And the 1.2% posted in 2008 is eerily similar to the start of the 2000/2001 hard market.
6. Reinsurance Hardening
Due to price increases in the property marketplace and increases in D&O coverage due to the financial crisis, 2008 and the first quarter of 2009 have shown definite signs of hardening in the reinsurance market.
Surplus is a measurement of underwriting capacity - and it is shrinking. Since the peak capacity of $522 billion was reached in September 2007, industry capacity has fallen by 20%. Further declines are expected for 2009. SIDEBAR
Surplus is a measurement of underwriting capacityand it is shrinking. Since the peak capacity of $522 billion was reached in September 2007, industry capacity has fallen by 20%. Further declines are expected for 2009.
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