Some Ill Tidings for Insurers Entering 2011

The insurance industry faces some headwinds entering 2011 – the most prominent of which is a persistent soft market.

The slack rate environment was quantified in a report by New York-based Guy Carpenter which noted that its Global Property Catastrophe Rate on Line (ROL) Index lost 7.5% - the second consecutive annual decline. The company says a combination of factors, including moderate loss activity and abundant levels of industry surplus are responsible for the dip.

Despite the gloom, Guy Carpenter does see a few scenarios under which rates could firm up. The first is a major catastrophe. “We estimate that a USD50 billion insured loss event would stem the decline of property catastrophe reinsurance rates for at least one year in the current, capital rich environment,” the reports states. “At USD100 billion, we believe “outlier” reinsurance entity failures could occur, while a USD150 billion insured loss event would create a decided and sustained market turn.”

A second is ongoing significant underwriting cash flow shortfalls, which have already turned marginally negative for the U.S. P&C sector.

Lastly, persistent low sector valuations could end up restricting market supply by prompting M&A activity or share repurchases programs by publicly traded insurers.

“In all, we expect 2011 to be a challenging year both in terms of the underwriting environment and underlying macroeconomic issues,” the report concludes.  “But it is also likely to be a year of opportunity, particularly if we see catalysts emerge that begin to change market fundamentals. In any case, firms armed with the best insight, tools and analysis will be those most prepared to position themselves for the inevitable changes to come.