Is the party over in inland marine insurance?
The late 1990s and 2000s, except for catastrophe-stricken years in 2001 and 2005, saw a remarkable improvement in already impressive combined ratios for the line.
Inland marine loss ratios continued to be at levels well below those of most property/casualty lines. On top of that, automation, which came later to inland marine than other lines, drove down the historically high inland marine expense ratios to produce some eye-popping operating results.
People noticed, says Patrick Carroll, senior vice president and regional manager in the Chicago office of Gen Re’s global property facultative operation, and a member of the board of directors of the Inland Marine Underwriters Association (IMUA).
According to Carroll, new entrants from London and Bermuda, as well as from the United States, entered the line, sparking an intense competition for inland marine talent and contributing to an erosion of operating results after the recession hit.
“My forecast for the future is not bullish,” he says. “Inland marine premium has been going down, and I can’t imagine the economy turning around in a drastic way, so I think inland marine premium will be down in 2010, as well.”
“In 2009, the inland marine line lost over a billion dollars in premium, a nine percent erosion of revenue in this line,” says Jerry Theodorou, vice president of research and consulting for Conning, the Hartford, Conn.-based research firm.
(Carroll and Theodorou both spoke at a special inland marine session at the AAIS Main Event conference in Fort Myers, Fla. Their comments for this article were compiled after that event.)
“More than a dozen new players, which were writing zero business in the line a decade ago, are now writing $600 million in inland marine premium,” Theodorou says. “Several companies have tripled, quadrupled, or grown their inland marine books by even greater multiples in the last decade.”
“For example,” he says, “there were 10 leading insurers who wrote $1.6 billion in combined inland marine premium 1999. “In 2009, these same companies wrote $6.3 billion, a fourfold increase.”
If overall premium has fallen while certain carriers have increased their writings, it follows that the inland marine has experienced “significantly increased market concentration,” according to Theodorou.
“As recently as 2003, the top 50 groups writing inland marine controlled 65% of the market, and in 2008 the top 50 wrote 91% of the business,” he says. “Looking at the top tier, a decade ago the top 10 inland marine carriers accounted for 47% of the market, compared to 58% today--a 23% increase in market share.”
Using figures compiled by Conning, Theodorou states that the gaps between inland marine and commercial multi-peril ratios, both loss and combined, have narrowed since 2006.
He adds that the inland marine loss ratio in 2008, the year of Hurricane Ike, was higher than in 2001 (World Trade Center) and 2005 (Hurricane Katrina).
“These observations are potentially troubling,” he says. “Moreover, there are indications that the recent decline in the inland marine expense ratio may reverse itself and head back upward.
“Among other things, industry sources report that new entrants are trying to attract business with higher commissions.”
A sluggish economy and an intensely competitive market for inland marine insurance have clearly empowered brokers, especially in the construction sector, according to Carroll at Gen Re.
“Brokers are doing more of the loss control inspections, and we’re seeing some ‘information shrinkage,’” he says. “We’re seeing less and less information provided as people are asking fewer questions.”
This both reflects and compounds the problem of a serious shortage of inland marine underwriting talent.
In addition to the new entrants, foreign and domestic, “existing inland marine carriers are recruiting experienced inland marine talent for stand-alone inland marine departments or for inland marine expertise in commercial lines departments,” according to Carroll.
“Fewer companies are hiring and training new people,” he says. “Companies want to hire expertise.”
“The lack of training causes concern for a couple of reasons.,” Carroll continues.
“First, it’s disappointing to see the “art” of inland marine underwriting fade a bit. The line of business has a long history.
“The other concern is a deterioration of underwriting and rating fundamentals in some traditional classes of business.”
“The ‘graying’ of underwriting talent and the cutbacks in training have resulted in a dilution of specialized inland marine expertise,” says Theodorou who notes that he was “holed up in a classroom for three months” studying policy forms before going out in the field.
“This model of developing underwriters is no longer the rule, “ he says, “as the introduction of IT has enabled a more process-driven approach designed to save money.
“The problem is that process and technology can detract from what underwriting is fundamentally about: applied common sense.”
Inland Marine, 2010
