Volume 21

Partners' Perspective

2012 Equity Risk Partners Year in Review: See! We Told You So!  

We are pleased to welcome you to our latest edition of the Partners’ Perspective entitled See! We Told You So!

When we last met our intrepid hero – A.K.A. the guy that writes those hilarious and insightful State of the Market commentaries – he was trying to educate the clients and prospects of Equity Risk Partners about the coming hard insurance market. Well, as I… um, I mean “he”… as he always says, “It is no fun always being right. But, it sure beats always being wrong!”

Over the past few months, as the 2012 renewals have rolled in, we have seen continued deterioration in pricing, despite the poor global economy. Usually, weakening global economic results would have a moderating impact on the firming of rates. That does not appear to be the case. As we discussed in our 2012 State of the Market report, we believe that the rate increases will continue a steady climb through the next renewal cycle.

We have seen firming of market pricing across all lines of coverage. No geographic area has been spared. No industry segment has been missed. In keeping with this election year, this will be a very democratic hard market.

Insurance Information Institute president and economist Robert Hartwig, outlines four main criteria for a “traditional” hard market.

  • Sustained period of large underwriting losses – We are well on our way. Certainly, underwriting losses of more than $36 billion last year can be defined as “large”. We just need to define “sustained”. Workers’ Compensation, approximately 18 percent of all commercial insurance premiums according to Fitch ratings, posted a 2011 combined ratio of 117 – 9.5 percentage points worse than the rest of the commercial insurance segment and the worst overall result for Workers’ Comp in 10 years.
  • Material decline in industry surplus / capacity – Not yet. Industry surplus has only fallen slightly from the record $565 billion in Q1 2011.
  • Tight reinsurance market – We are there. The Japan earthquake and Thailand floods have eaten up much of the reinsurance surplus. U.S. rates are up 8 - 10 percent. These increases from reinsurers get passed straight through to primary insurers and, ultimately, to insureds.
  • Renewed underwriting and pricing discipline – With the exception of Q4 2011 (when underwriters must have been in the “Christmas spirit”), the past six quarters have, indeed, shown strong underwriting and pricing discipline. Rates for Q2 2012 rose an average of 4.4 percent across all lines (per MarketScout).

As Ray Kinsella’s wife in Field of Dreams said as Ray rattled on about some unrelated issue, “Big whoop! What does it have to do with baseball?” You might ask “What does this mean for my renewal?” It means – go have a catch with your dad and your renewal will seem a lot less imposing.

Seriously, we believe that the factors listed above point us toward a non-traditional hard market. While surplus remains strong, the alignment of the other negative outcomes leads us to an expectation of a sustained hard market composed of continued strict underwriting discipline and ongoing moderate (5 - 10 percent) rate increases.

Underwriting discipline will impact insureds in two main ways. First, higher rate increases will befall those I deemed to be poor risks based on factors such as negative loss history, inconsistent safety management or difficult industry segments. Second, all insureds will deal with more strict policy forms. The “laundry list” of coverage enhancements that insureds have taken for granted over the past six to eight years will be replaced with more negotiating of terms and conditions. Having a broker that understands your industry will be paramount. Maintaining longer term relationships with insurers in order to “build a policy form” over multiple renewal cycles will be advisable.

We recently attended the Goldman Sachs Annual Insurance Symposium. The CEOs of the leading U.S. and global insurers echoed our sentiments.

  • Commercial insurance rates continue to increase and are expected to do so through 2012. A caution, as we discussed above, is continued economic deterioration in Europe.
  • Pricing for professional lines has not increased as aggressively as other commercial lines. There is continued strong competition, as well as new market entrants that have moderated the pricing increases. However, the return to underwriting discipline is very present in the current market. For example, Equity Risk is working with a new private equity fund in the process of raising approximately $100 million. Two or three years ago, there would have been significant demand from underwriters and very aggressive quotes with little underwriting follow up. Now, we have had multiple follow up discussions, multiple client conference calls and dramatically less aggressive pricing. Underwriting discipline is alive and well – for now.

Receiving “tight” terms and conditions and a higher rate at renewal while trying to manage your business in a difficult economy can be frustrating. We know – our terms and conditions and our rates for our own corporate coverages are undergoing the same transition. Not fun. Knowing that you were the beneficiary of several years of fierce price competition is of little consolation now.

Now, more than ever, it is important to start your renewal early. You can do your part by making sure you respond to the updated information request as quickly as possible. It is also important not to panic or to overreact. It is likely that the aggregate premium increases you will receive over the next couple of years will not exceed the aggregate rate decreases of the prior soft market. So, in the end, it is likely that you will still be ahead.

We will continue to update you on this very unique and fluid market cycle. Please do not hesitate to contact your Equity Risk Partners professional with any questions or concerns. While we do not enjoy seeing our clients get rate increases, we are always glad to provide them with value and guidance in a difficult environment.

As always, we appreciate the opportunity to be of service and thank you for your continued support of Equity Risk Partners