Indicators Suggest End of ‘Soft Market’ for Insurance

(To view the list of the top insurance companies doing business in Northwest Arkansas, click here.)

The “soft market” that has brought fire-sale pricing to some lines of commercial insurance will likely end in 2009, according to insurance executives in Arkansas.

That’s good news for insurance agents whose commissions have been depressed with the insurance rates, but not so good for the businesses that have enjoyed a respite from inflation in that budget line item.

“The casualty lines have been on sale in Arkansas for quite a while,” said Tim White, who oversees the four Brown & Brown of Arkansas offices. “Everybody in the last three renewal cycles has seen flat to decreasing rates, depending on what business you are in. It’s certainly not been going up.”

Insurance insiders talk about hard and soft markets as if the terms were self-explanatory, and that’s only half true. A hard market is what it sounds like: a period in which it is harder to find a company willing to write coverage for a given risk and then harder to pay for it.

A soft market is the opposite: Insurance companies are eager to take in premium and relax prices and underwriting standards to lure it in. And that’s what the U.S. insurance industry has been in for quite a while – as long as five years by some estimates, though Arkansas insurance customers probably didn’t notice it until 2007.

Recent events, from Hurricane Ike to the federal bailout of Wall Street, make it likely that the market will change for the harder, agents agree.

“If nothing else, probably prices will stabilize,” White said.

“I think we’re in for some hard times to come for a while,” said David Grimes, treasurer of American Management Corp., the Conway insurance wholesaler.

“We think in the next 12 to 18 months, certainly, something will happen,” said Ron Adams, president of Hoffman-Henry Insurance of Little Rock.

On Sale

Insurance carriers have three categories of funds at their disposal: reserves, profits from underwriting and profits from investments. And all three are hitting the skids, White said.

“Obviously, reserves are being somewhat affected by some of the storms this year, and the underwriting profits have seen some pressure because of the lower pricing that’s been going on,” he said.

And then there’s the third category.

“It won’t be a shock to anybody that most investment performance is off, no matter whether you are an insurance company or an individual,” White said.

That mix is likely to lead to a hardening of the market, the executives agreed, though the sluggishness of the overall economy will make it more difficult for insurance companies to raise prices too far too fast.

“What we don’t want to see is the insurance industry overreact and the market get very hard. That’s not good for customers and it’s not good for the industry,” White said.

Even casual observers of insurance pricing should have noticed that prices have been flat to slightly down on individual products like homeowners insurance and auto insurance. But the soft market has been especially noticeable in commercial lines, like workers’ compensation and general liability lines. Commercial auto liability has also been on sale, as White put it.

“Fleet pricing has been good. I don’t do trucking insurance, but my friends who do trucking tell me that trucking has been soft for the past few years,” he said.

Some commercial lines of insurance have been discounted 10, 15 or even 20 percent. And one notoriously hard line of insurance, medical professional liability coverage, has been strangely soft in 2008.

“We’re scared to talk about it,” joked David Wroten, executive vice president of the Arkansas Medical Society.

A half-dozen carriers are now actively pursuing medical malpractice in Arkansas, he said. Some of them had previously been willing to renew existing coverage, but the aggressive competition that sprang up in the past 12 months has resulted in premiums that seem pre-millennial.

“We are seeing some rates that are 30, 40 and, in some rare cases, as much as 50 percent less than we were seeing a year to a year and a half ago,” Wroten said. “Of course, I can’t tell you if those rates are actuarially sound, but it’s clearly a sign that companies want to compete in this market.”

One of the newbies is American International Group, the world’s largest insurance company and recipient of an $85 billion congressional bailout.

“They came in with some premium quotes that were way too good to pass up,” Wroten said, and AIG did sign a couple of large clinics.

Since the bailout, he said, “We’ve had a couple of calls from people wondering, and from everything we’ve been able to tell … AIG’s problems were not with their professional liability lines.”

While doctors are enjoying the price breaks, Wroten, too, predicts that the party will be temporary. In addition to the factors suggesting a general hardening of the entire insurance industry, med-mal premiums will probably be affected by the loss of one of the key provisions of Arkansas’ 2003 tort reform law.

The Arkansas Supreme Court in March 2007 struck down the requirement that an “affidavit of merit” be filed within 30 days of filing a medical malpractice lawsuit.

That requirement, Wroten said, cut down the number of claims filed by almost 50 percent. “And it was those kinds of cases that end up being dropped anyway. With the tort reform, they didn’t get filed in the first place because the attorneys had to do their homework.”

Some Winners

A moderately harder market would, however, be welcomed by insurance agencies that have had to make do on flat commissions.

“Commissions are off and sometimes dramatically,” White, of Brown & Brown, said. “It makes us have to operate very efficiently. But anytime something’s good for the customer, it’s ultimately good for the provider. We make it through the soft markets and we make it through the hard markets.”

Arkansas Business recently published its second annual list of the state’s largest insurance agencies. While only a few voluntarily reported premium written for both lists, the soft market is apparent from the number of companies that reported 2007 premium that was basically flat, even though the softening of rates became obvious only in the last half of the year.

Hoffman-Henry, for instance, reported $45 million in premium in 2006 and $44 million in 2007.

And 2008?

“It’s off more,” Adams said. “Even when you get to renew accounts, it’s not uncommon at all for that premium to be down 15 to 30 percent.”

AMC Corp. will write about $95 million in premium in 2008, Grimes said, which is about the same as last year. “We’ve gained some more customers. We’re hanging in there.”

The Arkansas Medical Society owns its own agency, AMS Benefits, to provide insurance to its doctor-members, and Wroten said its revenue is off.

“When you get in a soft market like this, it hits our pocketbook as well. But my primary goal is to help our members, so while our insurance agency may be suffering a little, I’ve accomplished my goal.”

Mike Luttrell is vice president of Walker Brothers Insurance Inc. of Springdale. The agency recently landed as the eleventh largest agency in the state with $32.59 million in premiums written in 2007.

Luttrell said rates have been going down for the last three years or so on commercial and business insurance, and that that will likely change at the beginning of the year.

“There’s a great deal of insurance that will renew on [Dec. 31] or [Jan. 1] … and that will tell us how the markets are going,” he said.

He said things in Northwest Arkansas may prove a little different than other parts of the state. As rates increase, premiums may still decrease some as hard-pressed business owners cut staff and inventories. The net effect may be a wash — or close to it — with the exception of very large commercial customers, Luttrel said.

There is only one way to maintain commission revenue, said Hoffman-Henry’s CFO, Dennis Edwards:

“You have to sell more; you have to sell harder; you have to be much more aggressive.”