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?
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
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
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
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