The Council of Insurance Agents and Brokers (CIAB)has issued a report that property casualty insurance rates in the US are stabilising, according to a recent story in the insurance trade paper Business Insurance.

The survey concluded that property/casualty rates are levelling off for the first time since September 11, 2001. That is interesting because there are still so many dynamics at play global insurance community for it to be stabilising already after 18 months of soaring rates.

As a result, I contacted brokers on the island to find out how the stabilising market is affecting them.

I was told that 2002 was a banner year for the Bermuda international insurance industry and as a consequence the brokerage community benefited because the brokerage community services the industry. One broker said that all Bermuda brokers had good results last year - not only because rates were strong but because the global marketplace has shifted in Bermuda's favour.

The global insurance industry faced several devastating losses in 2001 including the following:

The September 11, 2001 terrorist attacks which separated the strong from the weak

Enron's collapse which set off the professional liability crisis in the global insurance marketplace

The growing asbestos and medical malpractice crisis

A sustained bear market which lowered underwriting profits for most insurance companies.

However, the Bermuda marketplace benefited more than any other market last year in 2002 because a large percentage of the new capacity that came into the market after 9-11 came to Bermuda. As a consequence of this new capacity, the Bermuda market boomed in 2002 because brokers and clients wanted to access insurers unburdened by inadequate reserving practices.

Another major consequence of the new capacity was the expansion of the Bermuda insurance marketplace to include every line of business that is available in the insurance industry. With this expansion, Bermuda went from three to four viable insurers to more than ten in less than six months and therefore became a viable marketplace to all kinds of insurance buyers virtually overnight!

Bermuda also became a large reinsurance marketplace, something it had not been before except for the property cat reinsurers. This new capacity was a good thing for brokers and companies already on the island because it gave them very high visibility. It also created unexpected income for the brokerage community and established insurance companies.

It is estimated that last year on average in the property and casualty business, increases given were in excess of three times the premiums of 2001.

This year, quite to the surprise of many brokers those increases have come down dramatically particularly on the property side. One broker stated that the property market is already softening. However, overall Bermuda is still getting a larger market share of the property business by virtue of the fact that there are more property insurers here than there have been in the past.

On the casualty side (third party business), brokers expected to see more aggressive rate increases than are being handed out by underwriters. However, there are still certain classes of business, i.e. high hazard accounts, that are seeing significant increases. The increases are just not across the board as most brokers had projected. As a consequence their commissions from placing this type of business have fallen slightly below their projections.

Executive risks, including Directors & Officers (D&O) coverage, are still facing challenging times with rates continuing on the upward curve. This trend is likely to continue for quite some time because it is largely attributable to ongoing corporate governance controversies in the United States.

One broker said be believed the overall market is levelling off and therefore he agrees with the CIAB study. But he cautioned that this may be a temporary lull because rates could suddenly start to increase again if market problems come to light - for example if it turns out that more insurance companies inadequately reserved for large losses like Enron, September 11, 2001, and asbestosis.

He said that were still many market issues out there that have not yet been resolved. Many of the large insurers like AIG and ACE have recently announced huge adjustments to their asbestos reserves. But there may be other companies with weaker balance sheets that are hiding their lack of reserves in order to preserve their profitability.

Brokers are saying despite their results not being as stellar as they were in 2002, they are working even harder than last year. They still have the expanded marketplace to canvass to ensure they are getting the best deals for their clients.

And Bermuda is facing competition from a revitalised Lloyd's (for the property and casualty business, not D&O), European markets (D&O) and the USA, meaning their hit ratios (business written to business seen) are lower than they were in 2002.

The Bermuda market is also facing internal competition as individual carriers on the island have increased the amount of capacity they have to offer while others have entered into new lines of business that they were not writing last year. Some examples of expansions of the marketplace include Allied World Assurance Company increasing its limits, Max Re entering the casualty and executive risks lines of business as well as Arch expanding its D&O product line.

As a consequence of both internal and external competition, Bermuda brokers are already seeing non-renewals of accounts, which were only written as new business the year before.

That's a worrying sign because it suggests supply is outpacing demand for the risks that all companies consider to be the softer accounts while the tough accounts are remaining where they are.

This trend will ultimately result in some companies books of business being heavily unbalanced as far as soft to tough accounts are concerned. Consequently, insurers must be prudent to keep their rates at levels high enough to pay for unexpected losses if their books become adversely selected against.

Brokers have their work cut out for them as they try to find ways to meet their projections while making sure they are working in the best interests of their clients. 2003 will prove to be a tough one for brokers as they struggle to achieve the record results of 2002.

@EDITRULE:

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday. Feedback crduffycwbda.bm