Price Check.

Higher commercial-lines prices have customers shopping around, and some eager insurers are willing to cut them a break to get the business.

The commercial property/casualty market is beginning to show signs of hardening, even though January renewals don't approach the hard-market levels of the mid-1980s, according to several brokers and analysts.

"After 14 years of declining rates, it seems we have turned the corner," Hugo Warns III, an equity analyst with Legg Mason Woods Walker, said in February during the Insurance Distribution conference hosted by Legg Mason in New York.

January was a big month for renewals, Warns said. For example, 50% of St. Paul Cos.' premiums were scheduled to be renewed in January, he said.

Even with some evidence of rate increases, brokers were cautious in heralding an end to the soft market.

Andrew Rogal, president and chief executive officer of Hilb, Rogal & Hamilton Co., said it's too early to tell if rates are climbing, noting that the market is "much better today than a year ago...but we're hearing more about [firmer pricing] than we're seeing."

John T. Sinnott, chairman and CEO of Marsh Inc., said prices seem to be leveling off from steep declines.

"We see a difference today from what we saw 14 months ago, but it's in the single digits," he said. "We're seeing more stabilization. It's less a free fall, but it's not a radical change."

A Conning & Co. agent survey on renewals found that in both 1997 and 1998 renewal rates for all major commercial lines were declining, with workers' compensation and commercial multiperil dropping the most. A recent Conning survey of rates from the spring of 1999 showed prices continued to decline, but at a slower pace--a 50% drop in magnitude from 1998.

When faced with dramatic rate hikes, some clients are looking for sweeter deals with hungrier underwriters who don't ask for the same level of increases, said J. Patrick Gallagher Jr., president and CEO of Arthur J. Gallagher & Co. "There's an awful lot of trading of business going on," he said.

Workers' Comp Rates Rising

Kenneth Pinkston, vice chairman of Willis Group Ltd., said the rates of workers' comp renewals are improving steadily.

"What we are seeing now is 5%, 10%, 15%" increases in renewals, with 60% in severely underpriced markets, he said. Underwriters haven't been as firm with new business, he said, which is averaging increases of about 10%.

One bright area where premiums are rising is California, Pinkston said. California Insurance Commissioner Chuck Quackenbush has recommended that workers' comp insurers raise premiums by at least 18.4%.

Workers' comp carriers in California have traditionally underpriced workers' comp insurance, spending $1.40 for every $1 of premiums collected in 1998, according to the California Department of Insurance.

By comparison, the workers' comp market in Florida is still seeing weak premium rates, Gallagher said.

Unicover Factor

Still, workers' comp rates are expected to increase by 5% to 10% in the aftermath of the demise of the workers' comp pool managed by Unicover Managers Inc., Pinkston said.

The reinsurance and retrocessional markets also have tightened in the wake of Unicover, brokers said. The Unicover pool was built primarily on business from California workers' comp insurers, which priced their policies 30% to 40% below expected losses, then passed on the bulk of their risk to reinsurers. At the same time, some industry analysts have said, the reinsurers also might have lowered their prices, hoping to attract more business. The reinsurers then passed the business along to retrocessionaires, which cover reinsurers against losses.

Equity analysts have estimated that business generated through Unicover, South Plainfield, NJ., now known as Cragwood Managers LLC, could yield gross losses of $1.9 billion.

Banks in Insurance Could Boost Acquisitions

Brokers said they weren't worried about banks stealing their middle-market commercial-lines business, but they were concerned that banks would drive up the cost of acquiring agencies.

Banks, which in light of financial-services deregulation will be looking to venture into insurance, are a natural outlet for selling personal lines. But they wouldn't be as suited for selling commercial products, said J. Patrick Gallagher Jr., president and chief executive officer of Arthur J. Gallagher & Co. Gallagher was among a group of brokers speaking at the Insurance Distribution conference hosted by Legg Mason in New York.

A major banking company--which Gallagher declined to name--approached his firm recently about forming a strategic relationship. But the complicated inner workings of brokerages often lead to the failure of such alliances. "They said they had done 40 acquisitions of brokerage companies, and none had worked," Gallagher said. "Running a brokerage is like herding cats: It's very difficult. [Banks] are finding that out on their own."

Despite the stumbling blocks, Gallagher said banks would continue to acquire brokerages--a trend that could make acquisitions more expensive for everyone, especially in the rapidly consolidating brokerage industry.

Wade Reece, executive vice president of BB&T Corp., said the number of independent agencies had dwindled to 35,000 to 40,000 today--down from 90,000 a dozen years ago. "Banks are paying a lot for agencies, and we're competing with them," Reece said.

To avoid bidding wars with banks, brokers should avoid competing with them with efforts to attract acquisitions, said Andrew Rogal, president and CEO of Hilb, Rogal & Hamilton Co.

Among the top 20 brokers in 1990, ranked by U.S. revenue, at least 45% have been acquired by one of three companies: Marsh & McLennan Inc., Aon Corp. or Acordia. Only four of the top 20 in 1990 made it to 1998 without being acquired: Marsh & McLennan; Arthur J. Gallagher; Hilb, Rogal & Hamilton; and Norwest Insurance Inc., according to a Conning & Co. study.

The two largest brokers, Marsh and Aon, write 20% of all U.S. commercial premiums today, according to Conning & Co.