Topic 38

Thu, 31 Dec 2009 00:50:00 GMT

Title: Executive Summary
Overview:

Intense competition among insurers, increased capacity, and fewer insured catastrophe losses all played key roles in keeping U.S. insurance markets generally stable in 2009—and are poised to do so again in 2010.

The combination helped stave off a widely expected market hardening in 2009, although some specific lines of coverage—D&O for financial institutions, for example—did experience premium rate increases.

Click any of the tabs above for some key takeaways from Marsh’s U.S. Insurance Market Report 2010.

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Competition

Vigorous competition among insurers over the past year underscored a critical strategy in placing an insurance program: Marketing. Marsh brokers in nearly every line found insurers acutely aware of clients’ willingness to market their programs—even if the incumbent insurer had been in place for many years—and were able to turn that competition to advantage for clients. The results in many cases were lower rates or smaller increases and/or better terms and conditions.

Commercial Property Insurance

Expectations that premium pricing in the property insurance marketplace would harden significantly in 2009 proved unfounded.
Renewals, especially later in the year, often included rate decreases, increased capacity, improved terms and conditions, and/or reduced deductibles, especially for non-catastrophe (CAT) exposed or lightly CAT-exposed accounts with good loss histories.
Entering 2010—and barring a large CAT event—it is likely that property insurance markets will continue to stabilize and premium rates will moderate. Generally, more clients are likely to see rate decreases.

Casualty Insurance

Primary casualty insurers tried through 2009 to keep rates flat at renewals.
Pricing competition remained in the market throughout the year as insurers looked to write new business to offset premium lost due to clients’ exposure decreases.
Strong competition is likely to continue in 2010 as insurers remain moderately overcapitalized. It’s important to note, however, that conditions in the insurance markets can change rapidly.

Financial and Professional Lines

In 2009, competition among directors and officers liability (D&O) insurers occurred in the context of a divided market. In the market for commercial risks there was robust competition among insurers for clients with attractive risk profiles, although the magnitude of reductions shrank. On the other side of the divide, financial institutions and real estate investment trusts (REITs) affected by the credit crisis were still dealing with hard-market pricing, although the increases were moderating following relatively dramatic increases over the past two years.
Many employment practices liability insurers provided coverage enhancements—such a defense costs for wage and hour claims, increased thresholds for acquisitions, amended defense and settlement provisions, and insured-friendly severability/representation provisions—with greater ease and flexibility.

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Capacity

In the simple terms of supply and demand, as insurers increased available capacity, prices for insureds generally declined and terms and conditions improved.

Commercial Property Insurance

In property insurance markets, available CAT capacity did not diminish significantly in 2009.
Clients that purchased significant limits of CAT coverage (in excess of $US100 million) likely faced higher pricing as insurers sought to maximize returns on critical capacity.

Terrorism Insurance

There are a number of insurers with a theoretical maximum capacity of more than $US3 billion in the standalone terrorism insurance market as of the first quarter of 2010.
Capacity is relatively stable, but it can vary considerably, primarily due to location of risk, insurer's accumulation of exposure, and insurers' concentration of exposure.

Casualty Insurance

Umbrella and excess casualty liability insurance markets in 2009 were driven by additional capacity that entered the market during the year and by insurers that entered in 2008.
Excess casualty insurance capacity is at record levels with approximately $US375 million of new capacity entering the marketplace since January 1, 2008.
For very large firms, there remain only a handful of insurers willing to write lead umbrella business, meaning the excess casualty insurance marketplace generally is not as competitive for them.

Financial and Professional Lines

Given the ample capacity, it is likely that the D&O market will remain competitive for attractive risks, assuming relatively stable economic and litigation environments.
The employment practices liability insurance (EPLI) market has been competitive due to an abundance of capacity—approximately $US750 million.
In the fidelity market, long-term insurers have reported increases in both frequency and severity; however, the significant new capacity that entered the market in 2008 continues to help fidelity rates remain competitive.

Other Lines

The number of insurers offering environmental insurance continued to grow in 2009, leading to a significant increase—at least 25 percent—in capacity in the environmental insurance marketplace.
Political risk and structured credit insurance is one of the few areas in which insurers’ appetite to write their full line has been restricted over the past year. That situation is likely to continue in 2010.

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Catastrophe Risks

Much of the focus in property insurance markets has been and will continue to be on CAT exposures.

Few major CAT losses materialized in 2009 and rates began to moderate and stabilize.
In 2010, firms with minimal to no CAT exposure should typically expect higher levels of competition among insurers and rate changes generally ranging from minus 5 percent to plus 5 percent. Companies with moderate to high CAT exposure, on the other hand, likely will typically see higher average rate increases, generally from flat to 10 percent.
It is important to note some characteristics that affected the overall rate changes. Many significantly CAT-exposed clients elected to change the terms and conditions of their property programs to offset potential increases. Marsh’s benchmarking data shows that many CAT-exposed clients employed one or more of the following tactics to minimize rate increases:
- Reduced the policy limits of catastrophe coverage purchased.
- Increased deductibles.
- Reduced sublimits.
New models for earthquake losses may add some confusion to the property insurance CAT market. Clients should make sure they understand how these changes affect their unique portfolios. They should run the new models and scrutinize the results vis-à-vis those of the previous versions.

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Other Issues

Collateral

Underwriters have stepped up their scrutiny of insureds’ financials, leading to a generally more conservative approach regarding the acceptability, form, and amount of collateral to secure obligations under loss-sensitive programs. A continuous participatory process between clients, insurers, and Marsh has yielded favorable outcomes for many clients. Marsh has used a four-step process to approach clients’ unique collateral issues:

Engage claims closure expertise to ensure the raw losses are appropriately reserved.
Use actuarial capabilities and relationships with carriers’ actuaries to quantify the ultimate liabilities.
Create legacy and prospective program design solutions that may involve terms shorter than twelve months and leverage legacy collateral with prospective new insurers.
Engage in a dialogue with senior insurer credit officers to help them understand clients’ stories behind the numbers.

Legislation and Regulation

Environment

The increase in global environmental regulations continues to pose challenges for multinational firms, particularly those that have a centralized environmental risk management group.

Climate change remains a major concern to insurers and insureds. Recent court decisions have held that federal courts have an obligation to hear lawsuits alleging that climate change creates a public nuisance, presenting a potentially significant area of litigation.
Financial assurance regulations are being considered in some sectors to determine if new financial responsibility requirements should be developed. Insurers likely will develop new products or endorsements to address these issues.
In 2010, rates for environmental insurance programs driven by regulatory requirements, such as financial assurance, likely will remain generally flat, although the coverages within these forms may change according to additional exposures that new regulatory requirements may impose.

Employment Issues

Employers and EPL insurers are keeping a close watch on developments in employment regulation and litigation. There recently have been significant employee-friendly United States Supreme Court decisions; employment-related legislation, such as the Lilly Ledbetter Fair Pay Act, the ADA Amendments Acts, and the Genetic Information Non-Discrimination Act; and an overall increase in discrimination charge filings with the Equal Employment Opportunity Commission (EEOC).

Other legislative/regulatory areas that will bear watching in 2010 include:

health care reform;
potential increase in securities class-action lawsuits;
privacy regulations and other cyber issues; and
regulations aimed at the insurance industry.

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Category: Executive Summary

Topic 38

Competition

Capacity

Catastrophe Risks

Other Issues