Marsh: Soft market continues into 2011 but negotiations may become tougher

Forecasts of changing market conditions may sound familiar. One senior risk manager at a large retailer recently told Joe McSweeny, President of Marsh’s US and Canada Division, that he is seen as the boy crying wolf, saying every year to his CFO, “We’re not going to keep getting rate decreases ever year.” But of course he keeps getting them every year. “‘I do not know how long I can keep doing this,’” the risk manager told Mr McSweeny, who recounted the conversation during a webcast last week on the broker’s forecast for global insurance markets in 2011. “But he is cautioning his management that this will come to an end at some point. So we recommend that discussions start early and that we, altogether, develop back up plans.”hideIn terms of financial performance, the insurance industry is in a healthy position, Mr McSweeny said. The US property and casualty industry showed net after-tax income of $30 billion for the first nine months of 2010, up 74% over the same period in the prior year, according to data from A.M. Best Company. For buyers, that has meant abundant capacity and decreasing prices. But Mr Sweeney said there are “signs of concerns,” with reserve releases slowing down and interest rates ticking up in some countries. Insurers are now talking more about underwriting discipline and getting tougher on prices and terms and conditions, Mr Sweeney said, and some are declining to write business saying “the floor has gotten too low.” “So what does that mean to a client going into 2011? Well, it could be in some cases–and I do not want to over bake this because we still do, broadly speaking, see a continuing soft market for 2011–more difficult negotiations for some,” he said. Such was the message from a number of Marsh executives during the hour-long webcast, which provided an overview of various insurance lines and markets. Global property insurance markets, which continued to be soft in 2010, are poised to remain soft in 2011 barring any market changing events, said Duncan Ellis, Practice Leader of Marsh’s Global Property Practice. But the degree of rate decreases is slowing, he noted. For instance, Marsh’s US property insurance clients experienced rate decreases averaging 4.5% during the fourth quarter renewals, compared with 5% to 10% decreases earlier in the year. “Pricing in the US commercial property marketplace is probably a bit more fragile than people think with markets looking for opportunities to firm up rates,” said Mr Ellis, noting that has also been the case globally. “So, barring a market changing event, or carriers seeking to limit capacity thus impacting supply, rate decreases will likely be available for the first half of 2011 for insureds with favourable account specifics.” The London market is experiencing a continuation of last year’s rate trends, added Christopher Reeves, Bermuda Leader at Bowring Marsh, Marsh’s international placement division. Other markets in Zurich and Bermuda are also likely to show generally declining rates through the first half of 2011, he said. Natural catastrophes are always a potential market changer in the property segment. This year has already started with the destructive floods in Australia, although they don’t have the makings of a market changing event, Mr Ellis said. To illustrate the type of loss needed to turn the market, Mr Ellis cited a recent analysis by broker Guy Carpenter which estimated that it would take a $50bn insured loss event to stop the decline of property catastrophe reinsurance rates in the current capital-rich environment. A $100bn event would likely cause “outlier” reinsurance entity failures. A $150bn insured loss would create a “decided and sustained” market turn, with property reinsurance rates having a direct impact on the cost of commercial property insurance, he said. With regard to the US casualty market, Jonathan Zaffino, Global Risk Management Leader for Marsh’s Casualty Practice, said he foresees a continuation of the 2010 trends of abundant capacity and favourable rates. “Judging from our January 1 renewal experience, our expectations remain that 2011 will be a stable year from a buyer’s perspective,” he said. “For most companies, flat to slightly declining rate levels can be expected across primary casualty lines.” However, Mr Zaffino noted that there were signs that the US casualty market is beginning to show “some fatigue from a rate perspective,” particularly in the guaranteed cost sector. There are many similarities between the US and the broader international casualty markets, Mr Zaffino said. Ample capacity, particularly out of Lloyds of London and the London market in general, is driving competitive rate and product terms, he said. The number one factor that is keeping rates from hardening is competition. “It really is a supply and demand equation – and there exists significant supply to meet our client’s needs at this point,” Mr Zaffino explained. “When we factor in relatively healthy balance sheets and earnings from the carriers side...it is difficult to see any singular catalyst that will move the market.” Lou Ann Layton, Practice Leader of Marsh’s US FINPRO Practice, said the D&O insurance rate story in 2011 is similar to that of last year, with rates continuing to decline for all industries as competition remains high among insurers. Potential catalysts to a firming market would include a significant rise in D&O liability securities litigation, consolidation of any major D&O carriers, and if insurers sustain any large scale cat losses that would significantly deplete excess insured capital, she said. Concerning environmental coverage in 2011, Chris Smy, Global Leader of Marsh’s Environmental Practice, said he anticipates regulations globally will “more than ever drive the purchase of environmental insurance.” In Europe, Marsh is seeing increased take up of environmental coverage due to stepped up enforcement and the tougher regulations brought in by the European Union’s Environmental Liability Directive. Pricing for environmental coverage in Europe is “very soft,” Mr Smy said. “We have a lot more capacity, more carriers are involved, and it is a very aggressive marketplace. So it is a great place for those thinking of buying environmental insurance.”

Marsh: Soft market continues into 2011 but negotiations may become tougher

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