Fitch Sees Stealthy Soft Market Arrival In 2004

By Michael Ha

NU Online News Service, Dec. 18, 12:59 p.m.EST? A softening of insurance rates next year willprobably "sneak up" on the marketplace, creeping from one line ofbusiness to another, Fitch Ratings is forecasting.[@@]

"Our crystal ball says 2004 is likely the year that rates willstart to soften" said Keith Buckley, Fitch's managing director.

Mr. Buckley spoke at the New York company's teleconference thisweek at which the rating firm reviewed 2003 and offered predictionsfor the next 12 months.

Mr. Buckley noted that generally "I think it's safe to say weare looking for a continued recovery in the industry performance,reflecting the hard market condition, and from the top-lineperspective we think premiums will be up about nine percent in 2003and about six percent in 2004."

Overall, the industry is expected to show a "significantrecovery in profitability" this year, following modest profits lastyear and its worst operating year ever the year before, he said."Consecutive rounds of sharp increases in premium rates andimplementation of more conservative underwriting practices acrossnearly all business lines have improved market fundamentals," Mr.Buckley said.

Now is "a fascinating time to be an insurance industry observer"with so many different and opposing factors tugging and pulling ateach other, Mr. Buckley told industry participants, but in general,"we think most market segments are now probably about adequatelypriced." He added that the firm's "crystal ball" views 2004 as theyear rates will start softening.

But it's Fitch's position that when the marketplace ultimatelysoftens, it will soften at "markedly different rates, business lineby business line." This will be quite a change from the emergenceof the hard market "which came in broad, headline fashion after theevents of Sept. 11, 2001," Mr. Buckley noted.

"The soft market," he said, "will be harder to detect and maysneak up on many industry participants. So that means, for industryobservers, you have to recognize that different companies will beaffected at different paces, depending on their mix ofbusiness,"

Currently, Fitch's median insurer financial strength rating inthe p-c sector is "A-plus," while its median senior debt rating is"triple-B-plus," Mr. Buckley observed.

Mr. Buckley also noted that the "biggest near-term concern" forthe industry continues to be reserve adequacy. "We have seen up to$10 billion of adverse development in the first three quarters of2003, and we are looking for about 15-or-so billion dollars for thefull year, as insurers continue to play catch-up."

About a month ago, Fitch held a teleconference on the reservingissue, "and there we mentioned that as of year-end 2002, we thoughtthe overall deficiency for the industry ran in the $46billion-to-$77 billion range, which represents some 11 percent to19 percent of reported reserves," Mr. Buckley commented.