Commercial Insurance Market Softens

A.M. Best is maintaining its negative outlook for the commercial insurance market in 2006, but the surplus lines insurance markets is showing signs of strength.  Key comments from Best (see here):

• A.M. Best believes price erosion, loss cost inflation and higher reinsurance costs will lower profit margins for the U.S. commercial lines sector in the intermediate term (see here)
• A.M. Best's outlook is prospective in nature and takes into consideration the future consequences of price softening and the assumption that terms and conditions have already been compromised in certain segments of the market
• The sector's ability to preserve capital while maintaining balance sheet integrity through another prolonged soft cycle is of great concern

According to an interview in National Underwriter, the surplus lines industry is showing solid, although geographically uneven, growth (see here).

The strength of the non-admitted surplus lines market is that with less regulation it is able to offer a place for continuing innovation.

A.M. Best has commented on the impact of the 2005 hurricanes on the reinsurance business (see here), including the following:

• Significant price increases are by and large limited to business lines affected by the U.S. hurricanes
• The hurricane seasons of 2004 and 2005 have highlighted the unpredictability and volatility of natural catastrophe reinsurance

Clearly the post-Katrina hard market is not appearing, but we all knew that would be the case.