Like the popular shows of our youth now making a comeback on cable channels such as Nick at Night and TV Land, the insurance market of our youth is also making a comeback. Old TV shows never die, they just live on in syndication and old soft markets never go away, they just wait for the trendy hard market to run its course for an eventual return to the “old standards”.

The best parts of the old TV shows were the catch phrases uttered by our favorite characters. There is no better way to sum up the State of the Insurance Market in 2006 than through a sampling of some old favorites.

“And, now, Heeeeeere’s the Overview”

The State of the Property and Casualty Insurance Market in 2006 can best be described as mixed. Record catastrophe losses are impacting reinsurers on a global level. Higher reinsurance renewals are leading to double digit rate increases for most property insurance coverages. Rates for Directors’ and Officers’ Liability (D&O) insurance remain moderate. But, like the coming hurricane season, rate increases loom on the horizon. Errors and Omissions Liability (E&O) rates should be flat to lower. We can thank continued plentiful capacity for that. Additionally, new capacity continues to come into the industry. Unlike past inflows of capital, these new providers seem to be playing nicely in the “capacity sandbox” and have refrained – so far – from significant undercutting of rates. Liability rates are “slipping” and most states are enjoying stable markets for workers compensation.

“Holy Hurricanes, Batman!”

The Boy Wonder hit the nail on the head with that one.

The 2005 catastrophe season was, in a word, catastrophic. According to the Insurance Services Office, U.S. property/casualty insurers expect to pay a record $58.6 billion for insured property losses (“BAM”). This amount is more than twice the previous record set in 2004. It is important to note that the $58.6 billion reflects insured losses. As we witnessed in LA and MS, the amount of uninsured loss is equally significant.

Damage from catastrophes has doubled every year since 2002 (“POW”) and claim volume has increased steadily since 2000 (“KA-POW”). If this trend holds true for 2006, can we really expect in excess of $100.0 billion of property losses? A significant earthquake in a major metropolitan area (did my laptop just shake?), combined with another record hurricane season, makes that outcome look possible.

What would such a loss forecast mean for rates in 2007 and the current soft market? We think Scooby and Shaggy have the best reply – “Zoinks!”

“Hey! Let’s Be Careful Out There”

As Sgt. Phil Esterhaus warned his charges at the Hill Street Precinct before the garage door rolled up on Hill Street Blues, we can say the same about the property insurance market.

Catastrophe exposed risks are seeing double digit rate increases. And don’t be surprised if your manufacturing plant high up on a plain, hundreds of miles from water or a fault line is somehow determined to be “catastrophe exposed” by some property underwriters. $58.6 billion is a lot of money to recoup. As with any hardening line of business, rate increases are part of the equation. We will also see deductible/retention adjustments and changes in terms.

Non-catastrophe exposed risks should see reasonable rates during the remainder of 2006 – subject to loss history and insurer appetite. While ranges of 5% to 50% increases are being predicted, 10% - 20% should the result for most risks.

“Up Your Nose With a Rubber Hose!”

That Vinny Barbarino retort to his fellow sweathogs on Welcome Back, Kotter, is exactly the type of response one would expect to be hearing from the reinsurers this year. But, while the market did harden for January renewals, we did not see the across the board increases expected by the majority of the industry pundits. While mid-year renewals are likely to increase also, the financial fundamentals of the reinsurers appear to be stronger than anticipated. Non-catastrophe reinsurance results for 2005 were positive. This gave some cushion to the results and seems to have moderated some of the increases.

“DYN-O-MITE!”

The classic Jimmy Walker expression on Good Times is a perfect catch phrase for the 2006 D&O market. The expression is one of excitement and exudes a positive connotation. Current market conditions are stable. According to Business Insurance, there is “minimal rate movement, ample capacity, and no significant problems with terms and conditions.” Worldwide market capacity estimated at up to $1.7 billion has moderated rate increases, despite higher loss severity and frequency.

However, dynamite is also a very volatile substance that can blow up in your face. Rate increases and coverage restrictions continue to loom on the horizon. Depending on 2006 claims results, the 2007 market could very well explode.

“Sit On It, Potsie!”

The E&O rates, that is. The characters on Happy Days were constantly telling Potsie what they thought of his antics. The crew from the insurance industry has been telling E&O rates what to do, also. Coming off of 10% - 25% past rate increases, increased competition, and better than expected losses have led to flat to slight rate decreases in 2006. Rates and coverage terms should continue to be stable throughout 2006.

The areas to watch are:

1. issues associated with privacy and their impact on future claims;
2. whether or not carriers hit by catastrophe losses in 2005 are forced to shift capacity away from their E&O businesses

One or both of those occurrences could send us right back to double digit rate increases and reduced terms and conditions. Even The Fonz won’t be able to fix that. Of course, if you are in the insurance industry, rates for insurance company E & O remain higher than the fez Mr. Cunningham wore to the Leopard Lodge.

“What you talkin’ ‘bout, Willis?”

That would surely be the reaction of Gary Coleman if his brother Willis told him that liability rates have decreased and it has clearly become a buyers market.

Unless there is a significant reinsurance rate increase in mid-2006 for property and liability (appears to be unlikely, so far), we should see stable pricing for the remainder of the year and into 2007. Excess liability pricing and terms have followed suit, as well.

There is some concern that carriers looking to mitigate the needed significant property rate increases will increase liability rates slightly to make up the difference. Quality risks with carefully prepared submissions and a thorough marketing process should have no problems for the immediate term. Also, the availability of specialty liability markets should also be explored by insureds. These markets do not have the property pricing problems of the multi-line carriers.

As is always the case, tough risks – construction, transportation, chemicals – will find reduced capacity and stringent underwriting guidelines.

“It’s the Big One, Elizabeth”

Fred Sanford was constantly feigning his ultimate heart attack whenever a situation resulted in news that was too unbelievable to comprehend. Well, there is no way he would have been able to comprehend a workers compensation market that is stable, with flat to decreasing rates, and carriers actually looking to write business. In case you are wondering, Sanford and Son would pay a rate of $11.32 / $100 of payroll based on the “8265” Junk Dealer class code in California.

Speaking of California, the once poster child for workers compensation dysfunction is now filing for a 16% rate decrease on 7/1. Rates in California are 32% below 2003 rates, according to the Workers Compensation Insurance Rating Bureau. The National Council for Compensation Insurance (NCCI) places the industry combined ratio at 94% as of 2004. Most carriers believe rates are appropriate at this level.

However, workers compensation is the most “loss sensitive” of all lines of business. As all of you know, your ultimate cost of risk will be a function of your loss experience. Positive loss experience combined with reasonable rate structures equal a cost of risk well above “junk” status.

We hope that this nostalgic trip through your childhood favorites has given you a good sense of the 2006 property/casualty insurance marketplace. As always, an Equity Risk Partners professional stands ready, remote control in hand, to answer your questions and guide you through the program selections.

We thank you for your continued support of Equity Risk Partners and look forward to our next new episode with you and your firm.