Nonstandard automobile markets growing amid stiffer competition.

The nonstandard automobile insurance market has gone from slump to upswing and industry experts say the main battle zones are Florida, Texas and California. But is a market downturn already on the horizon?

"Anybody who is anybody thinks they have to come in (to those markets)," said Brooks Davis, president of American Hallmark, a subsidiary of Hallmark Financial Services that specializes in the nonstandard auto market.

The result, Davis said, is increased competition in a market that only a few years ago was in very bad shape. But the cyclical nature of the insurance market will eventually lead to another soft market, he said.

"The results, due to the competitiveness, are going to deteriorate," he said. "We've noticed a little uptick in the loss ratios of the guys who have reported. We've been through a few good years, and now the new guys are coming in, and the way they get business is by offering lower prices. The guys who maintain discipline are positioned for the good years."

This is what happened only a few years ago. In the late 1990s, maw nonstandard auto insurers attempted to capture more business by reducing rates. These industrywide cuts, combined with increased severity trends, contributed to the deterioration of industry loss ratios from 1999 to 2001. Some insurance companies withdrew from the market because of their inability to compete successfully, impaired capital positions or because of a decrease in the availability of reinsurance.

As companies dropped out of the nonstandard market, the remaining carriers raised rates and tightened underwriting standards, and nonstandard auto rebounded over the past few years. According to an A.M. Best report, published Dec. 20, 2004, evidence of the nonstandard auto rebound "can be found in Wall Street's confidence and several successful" initial public offerings. However, the same report cautioned that a decline in underwriting discipline and focusing on market share could lead to "disappointing earnings, weakened balance sheets."

Jerry Johns, president of Southwestern Insurance Information Services, said the Texas Automobile Insurance Plan Association--the state's assigned-risk pool--decreased 38% this year. If that trend continues, the assigned-risk pool will be at its lowest point since 1962, when it bad the least number of assignments.

Likewise, in Florida, the state's auto insurer of last resort--the Florida Automobile Joint Underwriting Association--has seen the number of policies decline significantly since 2002, said Executive Director Eugenia Tyus. The JUA's private and commercial automobile policy count combined in 2002 was about 49,000. A year later, it was down to 38,500. By last year, it had declined to about 14,000. Now, she said, it is at about 9,000.

Florida JUA Policies Dip

The state's auto insurer of last resort, the Florida Automobile Joint Underwriting Association, has seen its policies* decline significantly since 2002.

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* Estimates, private and commercial combined ** Year to date

Source: Florida Automobile Joint Underwriting Association