Market Overview Report
A Look Back – 25 Years
Security Insurance will be celebrating its 25th anniversary in 2008. The insurance industry has certainly changed in 25 years.
One big change has been the erosion of so many large insurance carriers, many of which have either merged with others or have gone out of business. The biggest reason for this is that traditionally the insurance industry has experienced a low return on equity.
From an agency standpoint, by far the biggest change has been the technological advances, which have increased the pace of business and the services we offer.
Another change is that insureds are now much more aware of the impact of safety and risk management. We believe that this is primarily due to the cooperative efforts between insureds, agencies, and their insurance carriers in continually improving your risk management program.
Our agency offers a broad range of services to help customers with risk management, including the following loss prevention services:
- Loss Control Services–we have 3 loss prevention consultants on our staff.
- Claims Management Services–we have 2 claims representatives on our staff.
- Internet Access to Risk Management Programs:
- Safety On-Line
- MyWave
A Look Forward – 2008
After a little bit of a history lesson, it is time to look forward to 2008. The insurance industry expects to experience zero to negative growth in 2008, with combined ratios under 100%.
The predicted zero to negative growth would represent the first decline in annual premiums since 1943, when volume declined 2.4% during World War II. While this is notable, it should be put in perspective. Premiums have been declining since 2003, when the hard market was at its peak, so this is more a leveling of growth than a sharp decline.
The combined ratios in 2006 and 2007 were under 100%. In fact, the combined ratio for 2007 is predicted to come in around 93.8% which is better than the 97.6% that was predicted. The implication here is that industry’s underwriting performance is declining at a slower rate than predicted. There are two major reasons for the better than expected performance. First and foremost was the lack of catastrophic losses in 2006 and 2007. Second, is that the industry made more than expected profits on their investments.
If the predictions for both 2007 (final results are not in yet) and 2008 hold true this will be just the third and fourth year since 1978 that the insurance industry has made an underwriting profit.
While all of the above paints a rosy picture for 2008, there still will be challenges. These challenges could pose more of a concern for late 2008 or early 2009 and beyond. Challenges include the potential for catastrophic losses, which have more of a direct effect on the coasts than they do in the Midwest. The biggest challenge is maintaining underwriting and pricing discipline. As outlined above the insurance industry has only turned an underwriting profit for 4 years since 1978 and this low return on equity has severely reduced the number of insurers in the marketplace.
As prices decrease, insurers will focus on reducing expenses to help prop up profitability. Some of the measures expected to be taken will be outsourcing back room operations. We have already seen some of our insurers reduce staff in response to decreased profitability. According to Ernst & Young, it is also expected that insurers will develop formal strategic cost management programs.
Casualty Insurance
As you will read throughout this report, the casualty insurance market is no different than most lines of insurance, as the prices will continue to soften. One trend that we have seen is that insurers in general are looking at more “outside the box” accounts than in the past. By using this strategy insurers are hoping to increase premiums by writing accounts that traditionally have had very little competition.
General Liability
The general liability market for 2008 is very much unchanged from what was experienced
in 2007. As in the past, underwriting discipline has remained. This year
underwriters may be willing to lower rates and provide broader coverage for accounts
with solid financials, favorable experience and excellent safety programs.
Commercial Auto
From a pricing standpoint we have not really seen much change from 2007. One
thing that we have experienced is that some underwriters are willing to decrease some
of the higher deductibles that were mandated in the hard market. Another trend
is that more carriers are now willing to write monoline commercial auto business.
Workers Compensation
Wisconsin experienced an overall rate decrease of 2.47% for workers compensation, for
the October 2007-2008 year. The following is a summary of the overall rate
change by Industry Group:
| Manufacturing | -4.4% | Contracting | -2.9% |
| Office & Clerical | +3.8% | Goods & Services | -2.1% |
| Miscellaneous | -2.7% |
Wisconsin continues to see new entrants in the workers compensation market and competition is heating up.
Umbrella/Excess Casualty
Umbrella pricing remains competitive for most risks. Most package carriers will
include the umbrella with the lead casualty. In cases where we need to place
an umbrella monoline we have been seeing reductions.
Construction
According to Reed Business Information, the overall economic outlook for construction
is projected to be up 10.3% from 2007. However, not all trades will experience
this increase. Transportation work is expected to be 4.1% and building construction
is expected to rise 14.6%. Residential construction is down which is affecting
water and sewer activity. Construction insurance rates will have the same general
experience as the rest of the market.
Long Term Care
Long term care facilities continue to find improvements in both the affordability and
availability of insurance. One emerging issue is with workers compensation. As
population ages and demand for business grows, facilities will need to hire more
people. A recent study conducted by NCCI found that average frequency from
1993-2005 was double the average for private industry. However, severity at
long term care facilities is below average, a statistic mostly attributed to the
relatively low wages when compared to the private industry. Some of the challenges
facing this industry include back strains due to lifting, assaults by residents and
the impact on workers compensation injuries resulting from an aging workplace.
Security Insurance has the tools to help you reduce frequency and keep severity in line. We have loss prevention personnel that specialize in the long-term care industry and can assist you with safety program implementation.
Property Insurance
There was very little national catastrophic storm activity in 2007, although the Midwest did experience its share of severe windstorm and tornado storms in 2007. Property insurance should continue to see premiums remain stagnant or be reduced. 2008 rate reductions are expected to be in the 5-20% range depending on how much of a rate reduction was given in 2006 and of course the risk characteristics.
Directors & Officers
The subprime crisis will have a direct affect on Director and Officer (D&O) insurers. According to Advisen, it is predicted that these insurers could have losses totaling up to $3.6 billion as result of the massive writedowns taken by financial institutions. D&O claims have already started to come in against companies that held mortgage or mortgage backed securities. If these losses spread from the financial institution sector, they could impact D&O pricing substantially.
Surety
While the final numbers have yet to be released, 2007 is expected to be another profitable year for the surety industry. While it is difficult to improve on the 2006 results that produced 4.9 billion in earned premiums and only $811,000 (16.4%) in paid losses, continued economic expansion and underwriting discipline has paid dividends to the nearly all of our top 100 surety writers.
A recent polling published in the November 2007 edition of Construction Executive shows that many of our industry’s executive leaders remain cautiously optimistic about 2008. Many have enjoyed revenue growth as a result of inflation and the continued demand for infrastructure improvements, without creating unreasonably aggressive underwriting and pricing for their surety products.
The evolution of technology has transformed our industry through the use of performance analysis/modeling, capital commitments, ROI, and credit scoring to provide underwriting benchmarks.
As we near the close of the first quarter of 2008, we face a variety of challenges including a slowing economy and strained federal, state and local budgets to meet infrastructure needs.
The crisis within the commercial banking industry, which was the direct result of overly aggressive and/or poor credit lending practices, the subprime fallout and stalled residential construction has tightened credit policy, negatively affecting commercial construction as well.
Given these economic indicators, capital preservation, rather than capacity, seems to be the order of the day. Reduced demand for construction services, increased competition, and aggressive pricing for the opportunities that remain will challenge many of our contractors this year.
Positive interim results will be key to maintaining confidence as the industry monitors the construction trends. Contingency planning and understanding your “true costs of doing business” will be key to creating opportunities and sustaining profitability in 2008. This will be true for both contractors and sureties alike.
Personal Insurance
The personal insurance marketplace is expected to remain stable, with no premium increases or decreases on the horizon. Insurance companies are offering discounts to retain their existing customers and looking for growth.
Loss Ratios in 2007 were good due to catastrophic losses being minimal.
Employee Benefits
Health Insurance
Health insurance premiums continue to increase. The two largest drivers behind
the premium increases are medical inflation and increased utilization of medical services. Utilization
of medical services continues to climb as the general population becomes older and
more overweight. Most employers will see renewal increases in the 9% to 12% range. Many
employers are increasing their health plan deductibles and co-payments in order to
control health insurance premium increases. Some employers are introducing wellness
programs as a method to control future health insurance costs.
Dental Insurance
Dental premiums continue to increase at a rate of 6% to 8%. As the baby boomers
begin to retire, many of our dentists will be joining them in retirement. The
result will be a decrease in the number of practicing dentists. In the future
we expect fewer dentists will belong to dental insurance provider networks, as they
will not be willing to discount their fees as required to join such networks.
Life and Disability Insurance
Both of these markets continue to be stable, and the pricing has also remained stable. Companies
now offer competitive contracts with multiple year premium guarantees.
Retirement Planning
401-K Plans
401-k plans are being reviewed these days with one eye
on performance and the other on expenses. The last several months of lackluster returns have caused participants
and plan sponsors to be critical of management fees and costs that affect the numbers. We
work with several companies that can deliver stellar choices for investing on a low
cost platform.
Long Term Care Insurance
LTCI is still a necessary consideration in retirement planning. The frequency
of need as well as the cost of care makes LTCI vital for a solid financial future especially
for those who choose to stay in their own home if nursing care needs arise. There
are a variety of carriers offering competitive products in this market.
Annuities
As with other retirement planning, current market poor performance is again suggesting
the need for stable and better returns for retirement investing. The annuity
marketplace has introduced several new competitive products in the past year. These
products offer ways to stabilize growth and provide predictable payments.
Life Insurance
The life insurance market continues to offer increasing competitive policies. Term
insurance continues to be inexpensive.
Conclusion
Insurance buyers can expect to see relatively flat or lower pricing in 2008 for property/casualty products, while most employee benefit products continue with a steady increase. The property/casualty market is expected to see little growth this year.
Economic factors will loom large as we move deeper into 2008 and early 2009. Both the subprime mortgage crisis and stock market results will play a role in the insurance marketplace.
As baby boomers approach retirement, please keep Security Insurance in mind. We have the tools to help you with your retirement planning.
Security Insurance continues to bring you tools and services for you to manage your risk and help make your account more attractive to underwriters.