Hard market by 2012?

Brokerage Stifel Nicolaus predicts that rates will climb by 2012, since insurers have drained off all of their excess loss reserves, National Underwriter reports:

As results worsen, Stifel Nicolaus said it expects carriers to either begin raising rates or dropping unprofitable business. These moves will result in 10 percent rate increases by the industry by mid-2012, the report said.

“Company by company, the industry seems to be slowly absorbing the fact that the gravy train of post-hard-market reserve releases is slowing down,” the report said.

Good luck with that. This dumb actuary does not agree with the underlying assumption – that companies set prices to drive a combined ratio. They set prices to be competitive in the marketplace, and that’s driven by good old supply and demand.

The supply is insurer capital, which is high right now. The demand is the need for insurance, which has been declining slightly for the past few years. So Adam Smith would seem to tell you that rates will keep falling, or at least not rise.

Reserve redundancy really doesn’t enter the equation. Insurers have set low prices and posted inadequate reserves to pursue market share in the past, and I have faith they can do so again.

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