Property insurance rates have deteriorated due to the soft market and could yet go into freefall James O'Sullivan reports.
Well, the good times were not going to last forever, and as far as the UK property insurance market is concerned they are over.
Whereas in the wake of the World Trade Center property classes were some of the first to benefit from a significant hardening, the market is now decidedly in the throes of a soft cycle.
According to the latest report from Datamonitor, extra capacity entering the market in 2004 meant that rates dropped by an average of 3% over the course of the year, with no indication that 2005 will be any different as far as declining rates are concerned.
According to Graham Heale, underwriting director for property at Royal & SunAlliance, there is no doubt that commentators are right to point to falling rates, though he feels the extent of the deterioration is not as bad as it has been in previous downcycles.
"Certainly we are seeing competition back in the marketplace from where it was two or three years ago," he says. "But is it a very soft cycle? I have seen it softer - there is a degree of discipline in the market driven by the need to make profits which are not there as a result of investment income, so generally underwriters are going about it in a more disciplined way."
However, despite the gradual deterioration in rates that is currently being experienced, there is still the possibility that, as has happened in vicious soft cycles in the past, the market could go into freefall.
The worry remains that the extent of the excess capacity and overly aggressive competition competing for greater market share will lead to dramatic pricing reductions. Heale, nonetheless, remains sanguine about the prospect of such a calamity.
He says: "Certainly it's a very competitive marketplace, but is it going to get to the sort of unsustainable levels we have seen in the past? There is an expectation of a soft landing some time in the second half of 2006 or the beginning of 2007."
Naturally with such a diverse sector not all areas are witnessing the same degree of competition.
Commercial property, and in particular insurance targeted at SMEs, appears to be one of the most aggressive arenas at the moment.
"It is not a soft market in terms of the rating we are currently achieving, but it is in terms of everyone's desire to underwrite property again," says Adam Boakes, UK development manager at commercial property insurance specialist Evergreen.
He adds: "I cannot think of one insurer that does not want to put property on the books again."
Kamikaze underwriting
In contrast to Royal & SunAlliance, Boakes suggests that the market is witnessing a degree of kamikaze underwriting, with discipline thrown out of the window.
"We are achieving level to 10% down on last year, but in the last month it has begun to go into absolute freefall with any quotes being given.
"The hard market was caused by a lack of capacity, but many insurers now have holes in their accounts and capacity to fill, so everyone is chasing income."
He adds that commercial property insurance for SMEs, which due to low premiums had been viewed as unattractive and therefore largely ignored by underwriters, was a relatively untapped area. However, he suggests that many insurers are now jumping on the bandwagon because the technology is enabling them to make better returns.
Heale agrees that the SME sector is proving to be one of the most competitive: "As always at the smaller end of the market, there is inevitably more competition.
"This is because almost everyone has the appetite to write this business, which is less volatile and less proneto large losses, so those with a limited appetite for property insurance will tend to compete in this area.
"But as the risks get larger and more technical there are fewer people with the capability to handle them."
Claims
The claims experience for UK property risks has not changed substantially in recent years, despite fluctuations caused by difficulties with subsidence claims as a result of changing weather patterns. The one stable characteristic, however, is that claims are on the increase.
According to the latest report on the issue from the ABI, entitled A Changing Climate for Insurance, weather-related claims on property insurance doubled to over £6bn between 1998 and 2003 compared with the previous five years, and the ABI predicts that claims could treble if no action is taken.
According to one senior underwriter, such a pattern is widely acknowledged among leading insurers, who will not be misled by a year of low claims into thinking that the trend is changing.
He says responsible insurers will not consider a benign claims pattern indicative of a long-term trend: "In terms of the risk characteristics it has not changed that much in recent years. Pricing is adequate for the exposure and, of course, we have seen people writing for income.
"Obviously you get freak years where the market does not suffer any big losses and this is when complacency can creep in among some insurers. But those who have been around appreciate that the market is volatile and keep an eye on these issues as we all know big losses can happen.
"You get isolated individuals at different insurers who are prepared to write business at any rate, but such insurers tend to be very short lived.
He says: "The real question to ask is not whether certain individuals are writing business at unacceptable rates and, if so, is this practice consistent across the market? I would say no."
For the time being, it seems, the soft market for property insurance in the UK is set to continue well into 2006. The really testing question that underwriters need to address in the coming months is just how far they will allow themselves to be drawn into the spiral of ever-decreasing premiums led by rogue traders.
As previous experience shows, chasing market share in a perilously soft market is a very risky strategy indeed.