The end of the Property and Casualty soft market

Hurricanes, both meteorological and financial, may well bring an end to what has been one of the softest of markets.
Gustav, Ike, and their to-be-named seasonal relatives have hammered the reinsurance markets, with Lloyd’s of London recently announcing losses totaling $12 – $18 billion for the season’s first two major storms. Lloyd’s also suffered from a dramatic reduction (>60%) in investment earnings, even though the vast majority of the syndicates’ funds are invested in government securities. The combination of storms and poor investment returns cut Lloyd’s members’ earnings in half.
The role Lloyd‘s plays in the international insurance market is a bit obscure to those not immersed in the P&C world. P&C insurance companies write policies for fire, auto, oil wells, pipelines, environmental liability, airplanes, and just about every other physical and financial risk you can think of (and many you can’t, such as credit default swaps). They don’t want all the risk themselves, so they pay part of the premium they collect to other insurance companies, called reinsurers, to take part of the risk off their hands.
When reinsurers raise rates, primary insurers are forced to do the same. That’s likely to happen; Lloyd’s (which is actually a group of individuals and companies and not a single entity) members will certainly want a better return on their capital than they are receiving today. That and the potential for higher losses from future storms will cause them to raise premiums and be more cautious about the risk they take – both measures that will force primary insurers to follow suit.
While reinsurer rates and coverage terms are key, they are not the only factor likely to turn the market. The demise of AIG and write-downs at other insurance companies with exposure to the credit markets make it critical that insurers raise more funds to bolster declining capital. The best way to do that is to charge new customers more, and sock away some of that additional cash (hopefully in investments that mere humans can actually understand).
The other technique is to reduce their exposure by being more careful about the risks that they do write.
Expect workers comp premiums to rise, along with property rates. Premiums for longer tail lines, like WC, liability, environmental impairment will likely increase further faster than sort-tail lines, but we can expect insurance rates to increase across the board.
The P&C market has been soft for several years. Those days look to be over.