State of the Industry

Wow, has it been August since my last post?! Sorry to all of my devoted readers. (Insert sarcasm here)

It has been a rough two quarters for the insurance industry. AIG is now owned by the US government. Hartford and XL have lost 90% of the share value. Large brokers have posted earnings down 50% or more from the year before. We believe that much of the pressure on the Property Casualty insurers is a bit overblown. The media seems to latch onto the troubled assets within AIG, XL, Hartford and many Life Insurers. These toxic assets are downward drags on the parent companies, but the underlying property casualty insurance entities are doing well and are well capitalized. It's important to separate the two, since the States control the underlying insurance companies and their capital cannot be touched for losses at the parent level. We are actually quite bullish on the property casualty business, particularly if AIG can spin off their main insurance operations AIU, which would help stabilize the industry. So, what does all of this mean to you the insurance buyer? Well, that depends on your industry sector.

Let's first look at the traditional commercial coverage of property and casualty: Worker's Compensation, General Liability, Property, Umbrella and Auto coverage. We are still seeing aggressive pricing and coverage terms for our clients in the Technology, Life Science, and Financial industries. In fact, recent rate reductions in NY for worker's compensation last year have resulted in lower costs for certain geographic areas on this year's renewal. We do see a firming on pricing... a holding the line for these types of insurance. The less profitable underwriting results of 2008 coupled with diminishing investment returns will force higher rates over the next 12-18 months, but for these lines of business there is capacity and competition, so we believe it will remain flat to slightly up.

Now let's look at the Professional and Management Liability side of the industry which encompass Directors and Officers, Error's and Omissions, Product and Clinical Trial Liability, Crime, Fiduciary Liability. In general, the market is still soft for private company D&O, but we are beginning to see a firming on the price as the financial crisis continues to force bankruptcy and closures. If you are in the financial sector this has been a DISASTER as pricing has been up anywhere from 25-100%. Our hedge funds that had solid performance and low redemptions faced flat to 10% increases. Any blip on performance, a fund closure or massive redemptions have resulted in major increases for our hedge fund clients. The other professional lines, particularly E&O are still in soft market cycle and more and more players are creating downward pricing pressure. This is a good time to be a technology company as your costs are still in line with 2008.

My advice for this renewal period: get ahead of the curve. You will likely need to provide more information than ever before and underwriters will be looking to push the pricing, so being out early provides time to find alternatives if your incumbent insurers are not keeping your costs and coverage in line. It will also be important to ask about the financial stability of your insurer and make sure you have A rated companies from AM Best.

These are challenging times, but that means there is tremendous opportunity.

Regards,

Rick Maloy