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Insurance Update & A/E Insurance
The U.S. property and casualty (P&C) insurance industry had a tough year with underwriting losses of $34.9 billion that were up from $6.3 billion for the same nine month period in 2010 with catastrophic losses up significantly. Net income fell to under $8 billion compared to over $27 billion for the same period according to a report by ISO, the Property Casualty Insurers Association of America and the Insurance Information Institute. The industry’s combined loss ratio climbed to 109.9 in the first nine months of 2011 compared to 101.2 in 2010 (>100 indicates losses). This is the worst nine month underwriting result since the 114.4 combined loss ratio for nine-months in 2001.
The insurance rating company A.M. Best has lowered its outlook for commercial property/casualty insurers to negative from stable a year ago. Best indicates many insurers have expressed the need for higher rates, however remains skeptical that a pricing increase will occur. Increased competition, economic climate, carriers entering markets outside their area of expertise and lack of underwriting discipline are factors impacting the industry's performance.
Industry analysis MarketScout states that based on Decembers 2011 composite rate, the soft market cycle has ended. They indicate there will continue to be micro-markets where rates will decline; however, on a composite basis, the trend is towards rate increases. They reported rate increases in November when they went up by an average of 1%. Conning Research & Consulting predicts a 3-4% increase in 2012 driven by catastrophic losses for many insurers with a 2012 forecasted combined ratio of 104% for the industry.
2012 Insurance Outlook
The 2012 insurance industry looks like it will be a mixed bag - some increases, decreases or the same. The industry has had one of its worst years in over a decade with some experts indicating price adjustments are under way while others are skeptical based on insurers practices and industry trends. The P&C industry continues to be challenged by volatile underwriting cycles, market focus, a shaky economy and the uncertain impact of new regulations.
In a recent Deloitte Report, they state there are opportunities for insurers to generate profitable growth in 2012; by attracting new customers as well as taking market share away from competitors.
In 2012, the growth options identified would include M&A activity, emerging markets opportunity and new distribution options. M&A activity is likely to be driven by losses in specialized market segments for carriers along with publicly-held companies under pressure to increase returns for investors.
A/E Insurance
Based on the U.S. Census Bureau statistics, construction expenditures are off nearly $430 billion from the $1.2 trillion mark where 2011 should have closed based on projections. The reduction has caused dramatic changes in the design and construction industry including significant reduction in annual revenues, reduced firm size, staff and overall consolidation in the architect and engineering (A/E) communities.
However, at the same time with the consolidation with fewer and smaller A/E firms, we now have more insurance carriers
(between 50 – 60 depending on who you talk to) supporting the specialized A/E insurance market compared to around 17 providers five years ago.
The increase in the number of carriers has several advantages for A/E firms – more options with an enormous amount of insurance capacity (amount of available insurance). The disadvantages - selecting a carrier has become more difficult with wide variations of features including low cost providers looking very attractive for cash strapped A/E firms in this challenging economic climate.
In this specialized insurance market, there can be significant differences between experience, expertise, policy features and services offered by carriers. As with A/E firms, this is a specialized sector which has a limited talent pool of experienced professionals.
A/E's: What happens when you work with an inexperienced contractor or consultant that does not have the background and expertise needed for a specific project type?
Results: Project performance and overall quality is impacted, reduced client satisfaction resulting in increased risk and exposures.
A/E firms are cautioned and advised to apply the same evaluation process selecting an insurance carrier that is needed when selecting any other project team member or business partner.
A/E firms should look well beyond just premium costs - evaluating important and vital characteristics of an insurance provider. With the dramatic growth of carriers in recent years, many may have limited experience in vital areas for this specialized insurance sector.
Word of Caution
Based on the challenges in the P&C industry, the financial imbalance with the number of A/E carriers all looking to increase market share, combined with a shrinking A/E premium pie, it is only a matter of time before there is a consolidation in the A/E insurance industry. A/E firms may find themselves with a carrier that is no longer interested in writing this business when claims start rolling in or your insurance has been purchased by another carrier.
A/E's Selecting an Insurance Carrier
SmartRisk next newsletter will identify the important aspects AE firms should consider when selecting an insurance provider.
If you have any questions, please contact SmartRisk.
Please feel free to forward this newsletter to others who may be interested.
Thank you.
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