Industries

Insurance industry still a buyer’s market

Clients continue to benefit from fierce competition for market share

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Marvin Daniel, president of KDW Home in Richmond, was surprised to see his premiums decline last year when he renewed commercial insurance coverage for the kitchen design company. He was even more pleased when rates dropped again this year even though KDW increased its coverage.

“The money we saved has been used for other business expenses that have not gone down,” Daniel says.

The savings come at a time when companies are doing anything they can to stabilize their bottom line and position their businesses for growth. Daniel, like other business owners, is benefiting from the buyer’s market that has been created by stiff competition in the insurance industry. How long will that last? Experts say at least through 2010.

Like other economic sectors, the insurance industry is affected by the troubled economy. The need to bring in extra business has created a “feeding frenzy” among carriers and that bodes well for commercial insurance clients. “Insureds are getting some pretty bargain prices right now,” observes Anthony Markel, vice chairman of the Richmond-based Markel Corp., which provides a variety of specialty insurance products.

The outlook for 2010 “remains positive” as rates stay steady and carriers fight for market share, says Walter Smith, regional agency manager for BB&T Insurance Services in Richmond.

Rates aren’t expected to increase until the economy has improved. “Insurance companies feel an underlying need to improve their results, but you have to be economically viable with businesses that are trying to survive,” observes Walker Sydnor, president of Lynchburg-based Scott Insurance. “How do you add higher rates in this type of economy?”

Competitive pricing isn’t the only element lowering the cost of insurance. Many clients are seeing additional savings from a reduction in corporate exposure (a rating that measures a company’s vulnerability to loss). The price decrease can be attributed to two factors:

• Companies are getting savvier at managing their losses.
• Many have seen their sales and payrolls decline because of the poor economy.

At the moment, market conditions favor clients, but Stewart Hargrove, president of IAG, an insurance advocacy group in Hanover, believes that companies can negotiate insurance rates regardless of market conditions. Hargrove’s firm serves as an outsourced insurance department for clients. He doesn’t believe that labeling the insurance market as “hard” (rates are more aggressive) or “soft” (lower rates because of competition) is helpful for insurance buyers.

“Brokers and agents have been using these terms for years to frame the expectations of their clients,” he says. “If your broker says ‘It’s a hard market,’ then you are not surprised when your premiums go up. If you broker says ‘It’s a soft market,’ then you expect your premiums to fall.”

The focus shouldn’t be on the terminology but rather on individual clients and their risk of loss. “You have to assess that risk,” he says.

Businesses shopping for insurance don’t have to worry about taking a risk when it comes to the financial strength of the insurance industry. Despite the publicity that surrounded the AIG bailout earlier this year, the insurance industry remains healthy. In fact, AIG’s insurance companies were profitable. The parent company got into trouble because of its involvement with speculative financial instruments known as credit-default swaps.

“AIG was the financial giant, and they got brought to their knees,” observes Tom Stiles, Mid-Atlantic region CEO for USI Insurance Services in Norfolk. “But AIG seems to have weathered the storm.”

Even though some insurers like AIG made risky investment choices, Hargrove sees “a lot of insurance companies that have strong balance sheets and seem to have a lot of capacity (the supply of available insurance).”

Most of the insurance industry, he adds, is “very conservative when it comes to investments and acts very responsibly when buying risk. Because of that, the business community can be more confident in the financial well-being of the industry.”
Although it is healthy, the industry isn’t increasing profits. Insurance carriers make profits from insurance premiums and investments. Early in the year, carriers’ investment income was hammered by a stock market nosedive that didn’t end until March. “That knocked the wind out of their profitability more than losses,” Smith says.

Normally, when investments are down, insurers increase rates, but that’s not occurring because of competition in the industry. The scramble for market share could become more intense with new competition from foreign insurers and some U.S. startups. Companies such as Max Capital Services, USA, a subsidiary of a Bermuda-based Max Capital Group, and Bermuda-based Hiscox have opened branches in the U.S. “They are making a long-term play,” observes Markel. “They are willing to take some bumps in the short run.”

Because of competition, Markel believes that “premium rates are approaching levels that will preclude profitability.” In general, they are down anywhere from 20 to 30 percent from four years ago, he adds. “The industry has gone below the rates necessary to produce any profit from an underwriting standpoint.”

Luckily for insurance carriers, the decline rate in pricing is gradually slowing. A study by the Council of Insurance Agents and Brokers showed an average rate decrease of 5.8 percent in the third quarter, down from 11 percent in the same quarter last year.

Another piece of good news: There were no damaging hurricanes this year, Markel says. The bad news: A mild hurricane season “creates naive buoyancy because the wind will eventually blow,” he adds. “It artificially keeps rates down.”
Many carriers have learned not to take underwriting chances in coastal and flood-prone areas after a mild season. That’s why “rates haven’t gone down as much in coastal areas, and capacity is a little tighter,” Stiles says.

The same rate-and-capacity scenario holds true for directors-and-officers coverage which is “more restrictive and more expensive” for companies that aren’t performing well, according to Smith. 

Even though rates are currently soft, interest in a “captive” model of insurance remains constant. “You would think people would come out of captives to take advantage of the low rates but what I am seeing is that it doesn’t happen too much. They like to have the control,” Sydnor says.

Not to be confused with self insurance, captives have cornered a significant percentage of the standard market for business insurance over the years. They are started by business owners who want more control of the insurance (underwriting, claims and investment decisions) or risk management process. “It’s a holistic management approach that some business owners like,” Sydnor says.

Many middle-market companies opt to join a member-owned captive group.  “They may be in the same business or a different business, but they have come together to form a captive insurance company,” Sydnor says. “What they don’t spend in losses, they get back in dividends.”

The economy has prompted commercial customers to examine all of their insurance costs and any alternatives that are available. “Usually insurance doesn’t get that much scrutiny,” Stiles says. “Now they have to look at every line item and every penny they are spending.”


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