SECTION: INSURANCE/INVESTMENT PRODUCTS: 2002 REVIEW - 2003 PREVIEW; Pg. 1

LENGTH: 1424 words

HEADLINE: In Property/Casualty Market, Hard Times Aren't So Bad

BYLINE: BY LEE ANN GJERTSEN and DAVID REICH-HALE

BODY:
For bank-owned agencies, large-scale price increases in the property and casualty insurance market mean long hours working with clients and insurers but also higher commissions and a bigger contribution to the bank's bottom line.

This pricing trend looks likely to continue into 2003 and perhaps 2004, industry experts say.

When prices for insurance coverage rise sharply, it is called a "hard market" in industry parlance. Such a market is "hard on many levels," said Edward J. Cooke, the executive vice president of R.C. Knox & Co., an insurance agency owned by People's Bank of Bridgeport, Conn.

"It's hard on the customer because the customer has to pay for premiums that were unbudgeted and unexpected, on the order of double-digit increases, up to 25% or more," he said. "It's also hard for the agents because we're trying to find markets for our clients, and markets have just shrunk up. And consequently prices have gone up." At the same time, Mr. Cooke said, a hard market is also "a great payday" for agencies that have watched commission income dwindle as prices dropped during the 12 years preceding 2000.

Mr. Cooke said his agency has an operating margin of 26% -- which means that "of every dollar of commission I bring in, 26% goes to the bank before tax."

Such a high level of profitability already makes insurance important to People's, he said, and rising revenues will only make that contribution more significant.

This year was the third of a hard market that began in 2000, said Robert Hartwig, a senior vice president and the chief economist at the Insurance Information Institute in New York.

A survey by the institute showed that the industry expects an increase in net written premiums of 12.3% next year, chiefly as a result of price increases and, to a lesser extent, increased demand.

Though 12% would be high compared with most recent years, it is slightly less than the 13.6% average gain estimated for 2002.

Though prices fell in the 1990s, the amount of insurance written grew enough to fuel small increases in net premiums, Mr. Hartwig said.

Despite the price decreases, there were "more cars and more houses and more businesses and more factories," he said. In fact, the booming economy of the 1990s, and the growth in insurance due to this, masked some big declines in pricing that occurred at that time, he said.

Today, Mr. Hartwig said, in a slowly growing economy, increases in net premium almost all come from price increases.

"With an eco-nomy that is next year expected to grow at 2.5%, you'd see that a relatively small fraction of (a rise in net premium) is actually due to increase in demand, and about 70% of it is due to price increases," Mr. Hartwig said.

Despite rising commissions, said John Queirolo, the president and chief executive officer of Webster Insurance, a subsidiary of Webster Financial Corp. in Waterbury, Conn., a hard market is not preferable to the alternative.

"It's for the worse, in my opinion," he said. "Whenever your clients are not happy, that's not a good situation. What do we say? 'We did a great job, but your policy is going up 40%?' That creates a relationship problem."

"It's also bad timing. It's a flat economy, they're having issues, and these rate increases come right out of their bottom line. I'm uncomfortable with that," Mr. Queirolo added.

Though the increased cost of reinsurance after major natural disasters and the terrorist attacks of Sept. 11, 2001, have contributed to the price increases, current economic conditions also play a part.

"The fact that the interest rates have descended to 40-year lows and that stocks are down for the third year in a row means that all the heavy lifting has got to be done by pricing," Mr. Hartwig said.

In addition, he pointed out, as some observers have complained that insurers are using price increases to make up for declining investment portfolios, "there is a link between the price of insurance and investment returns; that's indisputable, and it's always been that way."

During the 1990s, businesses benefited from the robust stock market and relatively high interest rates that made insurers' portfolios very valuable and allowed them to cut prices, he said, and "businesses did not complain that ... their insurance costs were falling in the 1990s -- I can't find a single complaint anywhere."

It is also important to note that the current hard market is no gravy train for the insurance industry, Mr. Hartwig said. A good portion of the increases are due to unprecedented insurance claims.

"Insurers are suffering through a great deal of financial difficulty as well," Mr. Hartwig said. "2001 was our worst year in history. Few businesses can say it was their worst year in history, outside of the airlines, and we make the airline losses look like chump change. We paid out $52 billion more than we took in last year; 9/11 was part of that but not all of it."

Even with price increases, the industry is facing losses from 2002, he said. "We're looking to pay out $24 billion more than we took in."

How much prices rise depends a lot on which line of insurance you are talking about, the industry observers said.

Certain lines -- like directors and officers insurance, which covers the seemingly ubiquitous lawsuits against top managers and directors of companies -- are seeing enormous price increases, 50% or more.

Meanwhile, property/casualty lines like personal lines homeowners and auto are not rising as much.

"D&O insurance is very difficult," Mr. Queirolo said. "Look at the disruption in the marketplace. It's severe."

Mr. Cooke predicted a "shakeout" over terrorism insurance and its cost. "Carriers are still trying to sort that one out," he said.

Mr. Hartwig predicted that even with price increases in 2003 the hard market will continue into 2004.

Insurers agree that prices will keep rising.

At an investors conference in early December, M.R. Greenberg, the chairman of American International Group Inc., said he expects prices to rise in 2003 and perhaps even in 2004, though the increases will vary by line.

Meanwhile, companies such as Chubb Corp., Allstate Corp., and Safeco reported premium growth in their third-quarter results thanks to price increases, and executives predicted these increases would continue.

Dean R. O'Hare, the chairman and chief executive officer of Chubb, said in a statement that his company saw net written premiums grow 33% in the quarter, compared with a year earlier. "I expect rates to remain on the upswing through 2004," he added.

For agents, keeping clients happy as prices rise means a lot more work to find insurers and help with loss control.

"The insurance market is hard, rates are up anywhere from 15% to 40%, so we have to work with our clients to help improve their risk profile," Mr. Queirolo said. "Are there quality controls in place? Is their loss exposure being managed in a way that satisfies the underwriters? In this climate, we absolutely have to do this."

"You have to spend a lot more time being even more diligent, looking for client renewals," he said. "But insurance companies have been rocked by the financial markets as well, and we want to work with stable insurers. Right now, there are fewer stable insurance companies."

Mr. Cooke agreed that helping clients with loss control and risk management and finding other methods of insurance risk transfer are important jobs for an agent in this kind of market.

For clients, "predictability in business is really the most valuable commodity -- if you know what your costs are going to be and can control them," he said. Clients facing large increases in their insurance bill need reassurance and choices, Mr. Cooke said.

He said that being a full-service agency that boasts a wide range of options for clients makes dealing with such a market easier, and can also help attract clients.

In a hard market, he said, more customers are looking to shop around for a new agent if they feel that their current agent cannot get them the coverage they need at the best price. This gives bank-owned agencies opportunities to get referrals from lending officers.

However, Mr. Cooke warned, not all clients who shop for a new agent fully understand the magnitude of the current situation in insurance.

"There's a lot of panic out there right now," he said. The client that's "willing to talk to anybody has not really come to grips" with the market.
 
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GRAPHIC: photo, Querirolo, Hartwig

LOAD-DATE: December 24, 2002