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Market Outlook - Mixed Signals for Change in 2012

November 2011 | New York RIMS Chapter Monthly Breakfast Meeting

Douglas H. Hartman, ARM

This was a panel of industry leaders moderated by Len Resto,risk manager of L3 Corporation.

Mike Martin, a senior underwriting executive at X.L. Insurance Company started off with "the Good, the Bad and Ugly." The Good: there is a "ton of [insurance] capacity." The Bad: "natural catastrophes" and "litigation over exclusions." The Ugly: High "combined ratios* due to price softness."

No matter how bad, the impact of the Tohoku tsunami and floods in Thailand "stayed in the local market," except for the contingent business income losses of manufacturers outside of Japan and Thailand who are dependent upon the supply of products and services that were interrupted.

Dan Aronson with Marsh followed with the casualty broker's perspective. He predicted "flat to 5% increases" in primary and umbrella liability insurance rates. Transportation risks will probably see higher rates. He put workers compensation into the ugly category due to a 118% combined ratio. Additionally, he observed, the rate of return on equity of insurance companies is at a 33-year low of 2.3%.

* Observation: When the industry combined ratio exceeds 100, aggregate premium and investment income are less than the claims and administrative costs incurred. Rates of return on equity decline, slowing the inflow of new capital. Underwriters react by asking for higher premiums and declining to quote on unprofitable lines of coverage. When premium rates go up and capacity dries up, this is called a "hard market," a term the panelists didn't use to characterize the current market.

Chris Cavallaro, CEO of ARC Excess and Surplus LLC, a privately held wholesale insurance brokerage concern, followed with a "D&O Liability Overview."

"The market is primed for change... especially in the management and professional liability markets." Primers of higher rates cited included the absence of any new private equity money, new federal regulations featuring higher penalties and MF Global, he said, "was going to roast the industry." The 2007 to 2009 period was the "First 3-year decline [in net premiums written] since 1933."

Mr. Cavallaro put a lot of intersting facts and statistics into is slides. One slide entitled the "Top 25 Securities Settlements," revealed that all of them settled for amounts in excess of $400 million. The largest, the $7.2 billion Enron settlement. Other slides indicated that the number of D&O and class action suits filed has declined in recent years. On the other hand, EEOC complaints and EPLI settlements are up.

Another exposure he disclosed is the theft of confidential information, over one-half of data breaches perpetrated by outsiders and almost one-quarter caused by the carelessness of employees.

My Take Aways

  1. Identify any supply chain vulnerability and take protective measures.
  2. Employers insured by guaranteed cost workers compensation policies: take a look at high deductible programs.
  3. Transportation services companies better redouble their accident prevention efforts.
  5. You can't buy too much umbrella, D&O and EPLI insurance.
  6. 2012 is not going to be a hard market for everybody but it will be harder for some buyers.

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