Here Comes the Hard Market - Phil Duncan

Here comes the hard market By Phil Duncan 02/29/2008


Yesterday two of the largest and most profitable insurance carriers announced serious financial instability in the insurance marketplace. Warren Buffet, the leader of Berkshire-Hathaway announced that "That party is over,” he wrote. “It is a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise.” He predicted that even with another catastrophe-free year, the industry's profitability will decline. “If the winds roar or the earth trembles, results could be far worse.” (Forbes 2/29/08). Warren Buffet was not the only carrier to feel the effects of the soft market and the housing crisis, even AIG is facing some tough decisions Joseph Cassano, is stepping down after the insurer reported $11.1 billion in losses on contracts sold to fixed-income investors (Bloomberg 02/29/08). Even Insurance Australia Group Ltd., the nation's largest auto and home insurer, said first-half profit dropped 68 percent, its sixth consecutive decline, as financial markets fell and storms increased payouts. The shares dropped the most in a month. Net income slumped to A$110 million ($95 million), or 6.07 cents per share, in the six months ended Dec. 31, from A$345 million, or 21.42 cents, a year earlier, the Sydney-based company said in a statement today. (Bloomberg 02/29/2008).
The prime indicator of a hard market is prime rate. I remember when I used to write P&C products in the last soft market. We were able to offer general liability to a general contractor building 1-2 homes for $500’s (and get paid 15% commission)! When this product was available prime rate was between 8.50 to 9.50% (http://hsh.com). Prime rate dropped to 4.0% in June 2003 and at this point in my career, working in the premium finance, industry my average policy premium for a similar risk was $20,000 (through a risk retention group!).
The next indicator of a hard market is when a California admitted carrier gets downgraded. Lincoln General (Which had an A VII rating this means100-250 million in assets) hit a major bump in the road According to AM Best as of December 18th, 2007, they have been downgraded and under review with a negative implication. They are now B++. HIH and Legion which were similar in financial strength, in fact HIH was Australia’s 2nd largest insurance carrier at the time according to According to the HIH 2000 Annual Report the company had gross premium revenue of $2.8 billion, total assets of $8.0 billion, total liabilities of $7.1 billion, with net assets of $900 million. 1 year later The federal government announces a royal commission into what is Australia's biggest corporate collapse.
Commercial Casualty Insurance Company of North Carolina in Liquidation Commercial Casualty Insurance Company of North Carolina did business in California under the name, “Environmental and Casualty Insurance Company.” The Norcross, Georgia, office of Commercial Casualty Insurance Company of North Carolina in Liquidation was closed effective June 30, 2006. (http://www.radtrust.com/ccic1.htm). ECIC is how our firm made a break in the premium finance world. Premium finance companies are the only entity that truly deals with all of the parties involved in the insurance transaction (For further information please review this article that I authored in 2003 when the hard market hit) http://www.insurancejournal.com/magazines/west/2003/11/03/features/33862.htm).
When any premium finance company or lender places a moratorium or limits your ability to finance a policy it is another indicator of a hard market or carrier insolvency. Our firm was unique because we had multiple lending partners so we were always able to place any premium finance agreement. We began to negotiate with all of our financial partners agreements that allowed us to place these risks, whether it was a RRG or an A Rated admitted carrier that dropped to insolvency in less then a year. The amazing thing was that we were able to maintain a 5% cancellation ratio on this book of business. Which allowed insured’s, brokers and wholesalers to have ample amount of time to place their book of business with the carriers that were accepting this risk. These insured’s that were being moved from under priced policies were backed by the almost bankrupt CIGA, which was also facing a horrendous workers compensation crisis (between 2001-2003 I recall 3 or 4 more admitted carriers going insolvent in the workers compensation field alone).
The solution for this crisis was the Risk Retention Group (http://www.nrra-usa.org/FederalLiabilityRetentionAct.htm). The problem was that most of the insured’s were moving from a $500 policy to a $5000 dollar policy. What complicated the matter is most agreements with the premium finance companies and their lenders required the contracts be between insurance companies with a B++ admitted or better rating. There were only a few RRG’s available at this time that were able to meet the financial requirements of the premium finance agreements so many construction related firms were unable to replace coverage. Even the Federal and State government realized the problem that was about to occur so Senator Burton introduced and passed the SB800 Bill which went into force on Jan 2003 in California. (http://www.leginfo.ca.gov/pub/01-02/bill/sen/sb_0751-0800/sb_800_bill_20020920_chaptered.html). This legislation protected the already fragile CIGA which was being depleted by loosely used underwriting guidelines.
I recommend that you re-evaluate all you clients. Learn to know you risk you are about to face some serious underwriting guideline changes. Good bye soft market!