The Elusive Market Turn
As we start the new year, the elusive market turn is on the minds of all insurance professionals. The 2009 combination of a tough economy and an intensely competitive insurance market was not kind to most insurance organizations, and 2010 is not showing any signs of change. So when will a change come?
One underwriter commented in late 2008 that the change would occur on 1/1/09 because prices were too low. Obviously wrong.
William R. Berkley, chairman and chief executive officer of WR Berkley Corp., sees a turn in the first half of 2010 (see here, here or here, from late 2009):
At current pricing levels with existing low interest rates, we believe the industry is operating at a net loss on an accident year basis; and a turn in the cycle is inevitable. We anticipate modest improvement in the economy and a turn in the insurance pricing environment in the first half of next year.
Maybe the insurance market is not that different from many other markets, and is driven by supply and demand. Supply is measured by the industry’s capacity to retain risk, traditionally measured by surplus. This alternative perspective is provided by David Bell, chief operating officer, Allied World (see here).
Insurance can be complex, but what drives the overall market is not. It’s supply and demand. It’s capacity available versus capacity in demand. What the market seems to need isn’t more capacity, but smarter capacity.
This doesn’t answer the question of when a turn will occur, but at least it provides some insight into what to watch for – reduced capacity. Capacity reductions will occur if insurer losses impact surplus levels, and pricing will change if the capacity reduction is significant enough.
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