Understanding the Insurance Marketplace

What causes fluctuations in the Insurance Market?

The one thing that is consistent about the insurance marketplace is its unpredictability and its cyclical nature. The market swings between fiercely competitive soft markets, where underwriters will often try to “buy” the business (i.e. quote premium and policy terms which they know will produce unacceptable loss ratios), to hard markets where premiums escalate dramatically and many industries find themselves virtually unable to buy insurance protection. One recent example of this lack of available insurance coverage relates to roofers in British Columbia, where even if they could find coverage the price was so astronomically high as to make it unaffordable.

Insurance Market conditions are subject to a number of key factors. These include:

• the frequency and severity of claims;
• legal and regulatory outlooks;
• economic conditions and interest rate environments;
• financial stability of insurers and reinsurers;
• the existence of competition.

Since 2001 the initial point noted above is of prime importance, for both 9/11 and natural catastrophes have been the major determining factor in insurance trends. Hurricanes Katrina and Rita demonstrated that catastrophe losses have been underestimated, especially concerning business interruption losses, and it is clearly evident that underwriters’ catastrophe modeling was seriously flawed. Global Warming will also have serious ramifications

While these catastrophe losses were absorbed by the insurance marketplace, ratings agencies downgraded the ratings of many insurers. Nonetheless, many investors saw the then current conditions of significantly increased pricing for catastrophe business an investment opportunity and significantly increased their investments for catastrophe business, and therefore capacity for such business. In 2006, in excess of $10 billion in new capital entered the market - in addition to $10 billion of replacement capital. This current increase in new capital is still insufficient to deal with the real growth of catastrophic exposure.

Natural disasters have not only affected underwriters’ property business but have had an effect on many other lines of business. When trying to understand the insurance marketplace, one must note that, in the United States, which is the largest market in the world, it appeared that 2005 was going to produce their 2nd underwriting profit in 27 years. The hurricanes changed this optimism to yet another underwriting loss.

Casualty (liability and crime) loss ratios have improved in some areas but continue to be of grave concern to underwriters in others, especially considering recent legislative changes and the ever-increasing litigious environment in Canada.

Projected global economic trends for 2007 are relatively positive. The overall economy is predicted to remain stable: growth will remain solid, and inflation will probably not pose any serious problems. The insurance market is expected to remain steady, provided catastrophe losses are “normal” and “manageable.” In late 2006 it was anticipated that the insurance market would remain steady but there are now signs of “significant competition” in “non – Catastrophic areas”; specific coverage in catastrophe areas may continue to be difficult to obtain or afford.