Insurer CEOs Eye Rate Drop 'Bloodbath'


National Underwriter News
June 6, 2006
Posted June 20, 2006

NEW YORK -- Industry leaders need to get the message to front-line underwriters to maintain pricing discipline, but even that won't prevent inevitable soft markets -- or a potential competitive pricing 'bloodbath' as early as October, CEOs said here.

Speaking at the Standard & Poor's Insurance Conference in New York, the chief executives -- Ed Kelly of Boston-based Liberty Mutual, Martin Sullivan of New York-based American International Group, and Dinos Iordanou of Bermuda-based Arch Capital Group -- sounded more pessimistic than S&P's analysts, who have stable outlooks on all sectors of the property-casualty industry.

"We don't seem to learn from the mistakes of the past. That's a fact," said Mr. Sullivan, responding to a question from panel moderator Thomas Upton, a managing director for S&P.

Mr. Upton asked if the leaders were concerned that underwriting discipline would erode as interest rates climb and memories of past reserve issues fade. Has there been any change in the industry that will prevent this? he asked.

"I've been in this business for 36 years, and candidly, we don't like good times forever," Mr. Sullivan responded. "The down cycles [of soft markets] that have emerged are always longer than the up cycles," he said.

"It's always been lack of capacity that's driven prices" upward, Mr. Sullivan added, noting that dwindling capacity in the property market, particularly in catastrophe-prone regions, is pushing those prices up. "We're seeing prices changes daily."

Mr. Kelly sees the property pricing situation differently. "There's plenty of capacity, but the price [of coverage] is pretty steep," he said, describing what he termed a "Mexican standoff between buyers and sellers." He said, "The buyers are waiting for somebody to blink." And given that it's already a few days into hurricane season, "some blinking is going to happen soon."

Later, Mr. Kelly said, "If there's a moderate hurricane season, I am concerned that there will be a bloodbath in the fall in pricing," noting that excess capacity may push top-line thinking "to take over overnight."

"Watch the October renewals in commercial [insurance]," he added. "That will be the first sign of lack of discipline, I think."

S&P analysts are thinking somewhat along the same lines, said S&P Director John Iten during a later session -- that a light catastrophe season could accelerate a decline in rates.

"But I don't think anyone in our shop was talking about a bloodbath," he said, reporting, for example, that monthly commercial lines price changes that have held at roughly -5 percent are among the factors supporting a stable outlook for now.

During the CEO panel, Mr. Kelly gave what he said was a simple view of how markets change.

"An underwriter comes in on Monday and turns down a piece of business. The market's getting soft. [By] Wednesday, he hears from the broker who says, 'You guys don't understand the market.' Thursday, he says, 'If I don't write something I'm going to lose my job.'"

It's incumbent on management to make sure underwriters understand they don't have to write a piece of business, he said.

"The cultural message has to start from the top," Mr. Iordanau agreed. "The burden falls on us to make sure that message goes through the organization."

Copyright © 2006 by National Underwriter News

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