A Market on the Cusp of What?

U.K. risk managers consider whether traditional insurance market cycles are broken, and foresee quite a bit more stretch of depressed rates.

By GRAHAM BUCK, who covers European risk management issues

BOURNEMOUTH, England---Sharply rising costs for fuel and other commodities are putting the squeeze on British businesses. The one glaring exception appears to be the cost of their commercial property and business-interruption insurance cover.

Risk managers at this week's annual conference of the United Kingdom's Association of Insurance and Risk Managers (AIRMIC) considered the possibility that traditional "cycles" of the insurance market are broken, even if only temporarily.

A benchmarking survey produced by AIRMIC and insurance market data group Advisen found that rates generally remained static from 2003 to 2011, with reductions slightly outnumbering increases, and little sign of imminent recovery.

"This is the eighth year of benign conditions for buyers in this class of business, and one has to ask whether it can accurately be described as a soft market any more, or whether it has perhaps become the 'new normal,' " said AIRMIC's Technical Director Paul Hopkin.

"The fact that even the recent spate of large natural and other catastrophes could not budge rates upwards suggests that they are likely to remain depressed for a while yet," he added.

In a panel discussion that focused on the outlook for the insurance market, Willis Group's Deputy Chairman Martin Sullivan described it as "on the cusp," noting that, while capacity is still abundant, the industry faces a cash outlay of between $30 billion and $50 billion over the next 12 months to 24 months. If this year's hurricane season turns out to be active, it will prove the catalyst for increases.

Both Sullivan and Lloyd's director of performance management, Tom Bolt, described the catastrophes that have marked the opening months of 2011 as "an earnings event rather than a balance sheet (event)," so the resulting losses, although serious, are nonetheless manageable.

FULL TIME ON SOLVENCY II

For Europe's carriers, the impending Solvency II capital adequacy regime is likely to prove every bit as testing, and the cost of complying is likely to trigger consolidation.

Bolt said that the Financial Service Authority, the U.K. financial services watchdog, wants each of Lloyd's 87 syndicates to be individually approved.

"The Corporation of Lloyd's employs around 860 people, of whom around 100 work full-time on Solvency II," Bolt said.

"The new regime's model works well for simple businesses, but less well for a complex organization such as Lloyd's," he said. "While we can live with it, the administrative burden is a problem, and it's already a tough enough market for making any money."

INNOVATION HAMPERED?

The panel also agreed that Solvency II was hampering the industry's ability to innovate, at a time when risk managers were seeking new products to address emerging risks such as the liabilities faced in connection with data breaches.

"It's difficult to actually get people around the table and for someone to actually take the lead," said Martin South, chief executive of Marsh U.K. "So brokers are pushing ahead and developing new products without properly consulting insurers.

"But now is just the time to innovate as the world is changing so quickly, yet products for supply chain risk, for example, haven't responded to that change," South continued.

Sullivan agreed, suggesting that the market had not really come up with any new major product launches since directors' and officers' (D&O) liability insurance, which flourished in the 1960s after being launched in the 1930s in the wake of the Great Depression, and environmental liability coverage, which was developed in the 1970s in response to the growth of the environmental movement.

"Both were motivated by the U.S. legal system and were subsequently exported elsewhere," he said.

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