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Fundamental Challenges

Market fundamentals challenge the soft market. Global regulatory scrutiny challenges the cost of doing business. The G-20 challenges equivalent broker standards. International protectionism challenges global markets. Had enough?

By  Coletta Kemper

As the Ides of March settle upon us, the economic picture is looking, well, a bit rosier than last year. Although the soft market persists, The Council’s 2010 Fourth Quarter Property-Casualty Commercial Market Index says an economic upturn is on the horizon.

As businesses expand domestically and internationally and we start hiring again, there will be a greater need for insurance to underpin the expansion. The improvements in brokers’ bottom-line revenues will be incremental, but at least they should head in the positive direction. The need to grow and, for some firms, the need for perpetuation and exit strategies will continue to drive mergers and acquisitions. Non-U.S. brokers will look for business opportunities as U.S. businesses increase exports.

The elephant in the room is when the market will turn. Fundamentals are fundamental. Are we over- or under-capitalized? Can insurers sustain negative cash flow underwriting? According to Gen Re chairman and CEO Tad Montross, the fundamentals simply don’t support a soft market. In his view, the perception that the industry is over-capitalized, causing rates to fall, is “just market banter.”

Market banter or not, the reality is insurers are still fighting to maintain market share and bring in new business. As our fourth-quarter survey clearly reveals, insurers are willing to compete aggressively to get that business. It also shows insurers’ efforts to hold the line on pricing is being overrun by their desire to grab market share.

While some in the industry predict the market will turn later this year, the question remains: How low can insurers go? Of course, a major catastrophe could accelerate a turn, but barring that and/or a hiccup in the economy, commercial rates could begin inching upward later in the year.

Healthcare reform is driving major change in U.S. brokers’ employee benefit business plans. With the market in flux due to the uncertainty surrounding Obamacare and the impact of medical loss ratio rules on brokers’ commissions, brokers can’t solidify their strategies. They will plan for the future but will be on pins and needles until things settle.

Global scrutiny of our business by regulators will increase, in part, sparked by the financial meltdown. Brokers will be challenged to comply with mounting regulations and will have to ramp up compliance tracking, both domestically and internationally.

Also ignited by the financial crisis is a global mission to establish international standards for the insurance industry. The G-20 gave a mandate to the IAIS, a body of international insurance supervisors, to set standards for insurers and intermediaries. Although the model standards aren’t mandatory, they set the tone for a discussion on how to regulate our industry.

For brokers, this includes how they should be compensated (fee only), what information they should provide the customer, how they should conduct their business and, finally, the extent of their corporate responsibility.

The challenge for the U.S. and others is making their regulatory schemes “equivalent” to the standards, even if they are not mandatory. If a country falls short, it could affect future mutual recognition agreements with other jurisdictions. A prime example is the EU’s Solvency II plan. If the U.S. fails the test of equivalency, U.S. carriers could find themselves at a competitive disadvantage to EU counterparts.

Another looming concern is protectionism. The Brazilian market threatens to reduce reinsurance capacity for large commercial risks in the country. Brazil is a booming economy, and the change will have a broad impact on brokers, insurers and reinsurers in the U.S., the EU and other markets.

In 2006, to much fanfare, Brazil reformed its reinsurance market to allow cessions to off-shore reinsurers. That law abolished the local reinsurance monopoly for the Brazilian Reinsurance Institute, which controlled the market since 1939.

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