Volume 18

Partners' Perspective

The State of the Insurance Market  2010 - The Social Media Edition

As we started to prepare for this year's The State of the Insurance Market, we did some research. Equity Risk Partners has significant benchmarking and competitive data as a result of our ongoing presence in the marketplace, so access to data was not the problem. We were stuck for a theme. We were looking for the unifying thread that would make the data manageable and the conclusions easy to digest. We decided to seek out what other commentators were writing relative to the state of the insurance market.

Then, we typed "Hard Market" into Google. As my grandmother would say, "Oh, dear!"

We are pleased to present you with The State of the Insurance Market 2010 - The Social Media Edition.

Ever since my bud, Ashton Kutcher, turned me on to it, I'm a big fan of Twitter. You can follow my tweets anytime at @ERPRockz. We decided to follow some tweets related to The State of the Executive Liability Market.

@D&OKnowItAll - "Dude, the market still sucks. Rates for public company D&O are still way soft."

@IKnowD&O - "Haha. Even tho the 2009 average class action settlement is $37.0 million, up from $28.0 million?"

@D&OKnowItAll - "LOL. Private company D&O rates are soft 2, cept for financial services."

@IKnowD&O - "Haha. That's cuz of xs capacity. ACE, Arch, & CV Starr are trying to increase market share."

@HandsToMyself - "What about Employment Practices Liability? What up?"

@ISueYou - "No change despite massive layoffs. ERP has seen increased notices in claims from its EPL clients."

@HandsToMyself - "Haha. So, premium rates remain flat. J"

@401kGuy - "No one cares about EPL! jkjk What about Fiduciary Liability, yo?"

@SnoopDog - "Yo. Everyone needs a sidekick."

@401kGuy - "??????"

@SnoopDog - "Wrong thread. Peace. Out."

@AssetManager - "Light claims + lotsa capacity = flat rates. Sweet."

@MasterOfUniverse - "Hi there. I am new to this Twitter. Please forgive any of my typos. I am still learning how all of this works. How many characters do I "

@MasterOfUniverse - "Sorry. Ha Ha. I am LOLing. What about GPL? Any insight on that?"

@D&OKnowItAll - "Dude. LMAO. Check out my blog - General Partnership Liability Outlook."

@MasterOfUniverse - "Thanks, dude."

General Partnership Liability Outlook

  • Carriers continue to see an increase in claims from the economic fallout.
    • Distressed portfolio companies and bankruptcies
    • Government investigations (SEC, DOJ, AGs)
    • General increase in regulatory oversight
  • Carriers are demanding more underwriting information for renewals.
  • Market has stabilized compared to last year's slight hardening.
    • Pricing has been flat for most renewals, excluding those with large claims.
    • Majority of renewals are with incumbent.
    • Coverage terms and conditions are aggressive.
    • Capacity has not been an issue. 
@StillNoJobAt40 - "Dude. you are soooo different from college. You're like, smart."

@D&OKnowItAll - "Fo' shizzle."

Hmmm. Is there any other insurance related topic we need to cover? Maybe we should check out Facebook and see what topics they are talking about...

Tony Marcon - likes being a Power Broker. It's like being a broker...with power.
          3 people liked this.          1 comment

     Facebook User - Tony, that is because ERP has the best
     brokers in the business!

Barack Obama - likes the idea of universal health care. It's good to be the king!
          3 million people without healthcare like this.
          Every business that has to pay does not like this.          5 comments.

     Glenn Beck - He's a socialist

     Rush Limbaugh - He-s a socialist

     Sean Hannity - He's a socialist

     Nancy Pelosi - He's the greatest President in history. Let's
     not only insure everyone, let's cap doctors' fees, let's
     make the businesses pay for it, and let's make sure those
     insurance companies aren't allowed to underwrite risk.

     Ken Ambos - Or check out ERP's blog which explains it all -   

Ken Ambos - Thinks Equity Risk Partners has an excellent 
grasp on the State of the Employee Benefits Market.

General/Macro Economy-Based Considerations

  • Carriers (e.g., CIGNA, Aetna, United Healthcare) continue to perform well financially, primarily the result of conservative new business and renewal underwriting, along with moderating healthcare inflationary trends. 
  • Healthcare insurer market has long been in a consolidation mode, such that there remains but four major national plays ("BUCA" - Blue Cross, United Healthcare, CIGNA, Aetna). Regional managed care organizations (e.g., Humana, Kaiser) are still viable competitors on a localized level, but may be at greater market volatility risk.
  • The higher likelihood of carrier consolidation we anticipated over the last year in the "ancillary lines" market (given financial hits taken by such stalwarts as Hartford, AIG, MetLife, Pru, etc.) did not pan out in any material way. However, this historically fractious field with a multitude of carrier options, coupled with lingering weakness of some larger market share players, suggests an upswing in M&A activity may be forthcoming.

Private Equity / Portfolio Company Implications

  • Healthcare Reform may have material impact on some deal and portfolio company valuations (e.g., paying government fees for employees certain employers did not previously offer any healthcare subsidy to).
  • Firms focused on healthcare industry investing (particularly technology/process support plays) undoubtedly have lots of opportunity/risk evaluating to do.
  • Continued firmness of industry underwriting/pricing resolve means private equity firms have to anticipate limited competition for their portfolio companies' benefits business.
  • Harder-edged pushdown of Consumer-Directed Health Plan (CDHP) options may be more achievable due to economic environment; collectively, an opportunity for private equity firms to more directly impact decisions on how portfolio company benefits/costs will play out.
  • Clear indications that this has been occurring are manifest in the increased level of interest in portfolio benefit aggregation analyses.
               150 people like this (all ERP clients)          1 comment
John Hill - Ken, this is great. But, at the risk of offending my boss, you did not mention Ancillary Coverages.

Non-Health (Ancillary) Coverage

  • Employers continue to evaluate reducing or even eliminating "non-essential" plans (e.g., Life/AD&D, Disability), though not many executed such actions in the past year. However, given the flicker of economic recovery on the horizon, it is growing less likely that this will be acted upon going forward. Voluntary (employee-paid) plans, particularly Dental, Vision, Life, and Disability, are certainly on the table. But we expect that implementation of voluntary offerings may be done more in concert with a reduction to company-subsidized plans vs. a replacement of them.
  • Health carriers that also have ancillary line products are offering cross-applied rate discounting to secure a profitability hedge - good for clients, bad for pure ancillary lines competitors. For example, CIGNA is offering discounts to medical rates if ancillary coverages (especially disability) are bundled with medical.
Beth Sennett - Great points, John. But, we also need to discuss Health Coverage. That is what everyone focuses on.

Health Coverage

  • The level of market competition has remained generally conservative - preservation of market share with margins intact appears to be preferred to growing market share. An example of the more rigid underwriting being employed of late is the near uniformly negative market response to groups with low levels of employee participation. Fear of adverse selection (only the higher risk people are covered) is driving most carriers to enforce guidelines that have always been there - e.g., if less than 70% of eligible employees are in plan [excluding those with spousal coverage elsewhere], they almost surely will be no-quoted.
  • The bottom line is, renewal underwriting is marginally less conservative than last year. Carriers seem a bit more willing to negotiate, though competitive market studies are often required to drive those negotiations, as opposed to objectively arguing the merits of their underwriting analyses. New business underwriting isn't much more aggressive than last year, but some glimmers of competitive pressures are beginning to appear.
  • Health plan rate increases continue to track in the 9% - 12% range, with net rate increases averaging 5% - 8%.
  • Average per-employee cost rose by 5.5% in 2009, the lowest increase in a decade.
  • Plan design changes focus on increasing deductibles and co-payments, tightening up prescription drug plan parameters, and eliminating richest level of coverage previously offered as an option, effectively ratcheting down the whole menu.
  • CDHP - virtually all client renewal discussions continue to include address of savings available via account based CDHP options.
  • Clients' willingness to transfer health coverage remains at a heightened level, given the financial pressures many continue to experience; the cost savings threshold to rationalize enduring the related disruption of carrier change is narrow. However, actual transition activity of our client base has not been extraordinary - largely a function of marginal competitive underwriting from non-incumbents.
  • Beyond pricing, other key decision points for employers pondering health carrier change include:
    • Provider network breadth - has to be comparable to secure competitive rates.
    • Carrier service performance (more an issue on the incumbent side of the ledger)
    • Brand image/reputation (can be an issue for both incumbent and alternatives).
    • "Wellness" programs - interest level is again rising, particularly for larger clients.
  • Employee satisfaction seems to be more of an issue this year - given the slight improvement in the economy, employers are starting to look for ways to soften the hammer blows their workforces have been absorbing.
  • No discernable trend relative to clients opting for insuring vs. self-funding their health plan risk. This remains more a function of client risk tolerance (assuming they truly understand the funding difference implications) than a market/product driven decision process.
  • Employee contributions are still generally rising, often in proportion to overall employer rate increases (weighted increasingly toward dependent coverage costs being borne more by the employee), although some employers are trying to hold the line on contributions given wages have been frozen or even reduced over the last 12 to 24 months.

Lastly, we typed "State of the Market - US Property and Casualty" into Google. Of the 9,243,873 hits that occurred in 1.3 seconds are the following:

G o o o o o o o o o o o o g l e

"California State Association of Markets" Nope.

"Insurance Pricing Still Soft, With No Rebound Until 2011"; National Underwriter - 4/26/10

"US Property Market in a State of Flux to Cause Casualties" Nope.

"Buyer's Market Will Persist Into 2011, Rate Cuts For Key Lines Moderating"; National Underwriter - 4/12/10

Ah, here is a good one... Let's click on it.

Property and Casualty Overview

  • Industry's net investment gains increased approximately 31% to $43.5 billion.
  • A.M. Best reports $11.0 billion of favorable loss-reserve development.
  • Net income increased to $31.1 billion.
  • Net premiums written declined approximately 5.9% to $419.3 billion.
  • Combined ratio improved to 101.2 in 2009, down 104.0 in 2008.
  • Policyholders' surplus increased approximately 9% to $519.3 billion.

Challenges and projections for 2010:

  • Competitive market conditions, slow economic recovery, higher catastrophe losses, and low interest rates will produce strained profitability measures for 2010.
  • Excess capacity, weak macroeconomic conditions, and risk transfer alternatives will continue to affect top line results.
  • Mortgage and financial guarantee combined ratio = 191%.
  • Many insurers are too optimistic about loss trends, and are prematurely releasing loss reserves that will affect future results.
  • Atlantic hurricane season produced only nine named storms in 2009, with only three reaching hurricane strength. This is the lowest activity in over a decade. The 2010 hurricane season is expected to be more active.

Property and Casualty Commercial Lines Segment

  • Net premium written declined 11% to $178 billion.
  • Reported net income increased to $15 billion.
  • Policyholders' surplus increased to $225 billion.
  • Combined ratio = 99.9%, excluding the results for mortgage and financial guaranty insurers.
  • Favorable prior-year loss reserve development.

Challenges and projections for 2010:

  • Premature takedown in reserves.
  • Premium erosion is likely to continue based on capacity and moderate loss cost trends. Capacity for insurance is abundant in most lines, but the demand for that capacity has been diminished by the recession.
  • Decreased demand will prevent most rates from rising in 2010.
  • Decreased payroll and sales for many businesses affected by the recession will affect the premium volume of the market for lines of business based on these factors.
  • Insurance companies are looking for new avenues of growth to compensate for their decreased premium volume. The continued soft market will encourage insurers to offer new products, provide coverage they previously were hesitant to offer, and improve the terms and conditions of their current insureds.

Property and Casualty Reinsurance Segment

  • Net premium written increased to $24.1 billion.
  • Net income increased to $6.3 billion.
  • Combined ratio improved to 92.2% from 99.8%.
  • Favorable experience in 2009 due to modest catastrophe losses and prior-year loss-reserve development.
  • Unlike the primary carriers, the reinsurers refrained from pricing wars in 2009.

Challenges and projections for 2010:

  • Sufficient capacity will extend the soft market phase to the reinsurance segment, so they most likely will engage in price wars in 2010.
  • U.S. reinsurance market return on equity and revenue for 2009 was 16%.
  • Bermuda reinsurance market reported returns on equity and revenue for 2009 at 20%.
  • January renewal business had rate declines of 5% to 10% on property business, and was flat on casualty business.
  • Despite first quarter income impacts, catastrophe losses from the Chilean earthquake, windstorm losses in Europe, and other global events, the impact on reinsurance capital is not significant.

This concludes our annual review of The State of the Insurance Market. We hope you found it helpful and informative.

As my son would text, "Thx 4 yur continued support of ERP."