Recent growth in insurance premiums may signal a shift that will make banks interested in buying underwriters, experts say.

The rise - 1.9% last year and a projected 2.9% this year, according to the Insurance Information Institute - suggests that at 15-year-old buyer's market for policyholders is coming to an end, they say. Such a market - a soft market, in insurance lingo - has made underwriters unattractive targets. And it has lasted so long that some wondered if it would ever end.

Hard markets, good for insurers, tend paradoxically to result from bad news - disasters that soak up capital and spur underwriters to raise premiums. With less money available for reinsuring policies, insurers are more cautious about what kinds of policies they are willing to write, and prices rise.

Eventually, the strict underwriting guidelines mean fewer big losses. Insurers make money, and more capital flows into the marketplace.

Over time a soft market - characterized by an oversupply of capital - develops. Insurers, competing to gain market share, lower their prices to attract customers. Some insurers may become overextended with large exposures to big losses.

Because of slow premium growth, banks' chief financial officers have discouraged the purchase of underwriters, said James Overholt, a senior consultant and manager of financial services programs for Milliman & Robertson Inc., a Chicago firm that works on insurance merger and acquisition deals.

"Clearly, if the financial results in terms of return on equity are better, then the chief financial officers of the banks would be more inclined not to fight" an insurer acquisition, he said.

In recent years many banks have judged buying agencies more profitable than buying underwriters, Mr. Overholt said. "If you change that equation and create a better return, along with your desire to control the product and control the service, the scale might be tipped in favor of buying" underwriters.

The property-casualty insurance industry has followed a boom-and-bust pattern similar to that of banking, though not tied to interest rates.

The last hard market peaked in 1986 at 22.18% premium growth, said Robert Hartwig, chief economist of the Insurance Information Institute, which is based in New York. By 1998 the figure had dipped to 1.8%.

Reasons for a rise now include the bottoming out of prices for some kinds of insurance and strong demand, spurred by the economic boom, for coverage of new buildings and purchases.

These trends indicate a turn in the market, Mr. Hartwig said.

A hard market "could change the dynamics," said Richard H. Klovstad, vice chairman and chief executive officer of PNC Insurance Services Inc., a unit of PNC Financial Services Group Inc., Pittsburgh.

Still, he predicted more consolidation within the insurance industry before the banks start buying underwriters in any numbers.

Mr. Overholt of Milliman & Robertson said the immediate profitability of insurance may be of secondary importance to banks, because making a lot of money is not their primary motivator for entering the industry.

"The overpowering reason that banks need to and are moving into the insurance industry is to reposition themselves as financial services companies rather than simply banking companies," he said.

As a result, banks have not succumbed to the competitive pricing frenzy that has prolonged the current soft market, Mr. Overholt said. Instead they have focused on service and on packaging products together, and that has worked to their benefit, he said.

It may be slow going, though. Mr. Klovstad said his firm has seen little evidence of hardening in the personal lines market, as opposed to commercial lines. And with the market still soft, there is less impetus for banks to buy an underwriter.

When banks contemplate buying an insurer, they "are looking at the potential of making a dilutive acquisition in a slow growth market," Mr. Overholt said. "If that should change - if the return on equity can get healthy again, and if the market can start to grow - then that presents a different equation in terms of the underwriting side of the business."

That financial services stocks have been under pressure has also kept banks from buying insurers, Mr. Overholt said. "That is certainly a factor and has been a factor in the last two or three months. Some banks that have been interested in making acquisitions in the insurance industry have just not been able to."

By getting involved in the distribution side of the market, experts said, banks have protected themselves against underwriters' recent poor showing while reaping commissions. "In a good market or a bad market, the commissions don't change much," said John M. Watts, executive vice president of Michael White Associates, a Radnor, Pa. consulting firm.

However, many banks have been making money on annuities, which are not affected by the property-casualty insurance cycle, Mr. Watts said. "Most times personal lines property casualty is a minor item for banks, as far as generating fee income," he said. "The bigger income generators in insurance are annuities, life insurance, and commercial property-casualty insurance, which tend to be more stable."

Mr. Watts said his firm tells bankers to carry homeowner and auto insurance as an accommodation, but not to expect them to be big profit lines.

Mr. Overholt, however, said many banks have been successful selling property-casualty insurance. "If you are buying strings of agencies, you are probably buying strings of casualty businesses. Many of these banks report that is very profitable and is, in fact, their primary strategy," he said.

Some say aggregate data - like the information that shows the market's overall condition - do not accurately reflect the issues that have made convergence important.

Jean Bernard Duler, founder and chief executive officer of esurance.com, a San Francisco insurer that serves online banks, said the traditional agency system includes extra costs, such as commissions for insurance sales agents. The ups and downs of pricing will have less effect on the financial services industry than other trends do, he said.

Mr. Duler said he thinks the future of convergence will involve not the buying and selling of insurance companies, but rather strategic alliances between companies whose core competencies - banking services, loans, or underwriting insurance - complement one another and can work together through a central platform, ideally online.

"The insurance industry is very inefficient," he said, "but when they go direct, they have very low processing costs." Saving on transaction costs could help banks perform better than insurers that are tied, whatever the market, to the agency distribution channel and legacy systems, he said.

A hard market often favors alternative forms of insurance - such as captive insurance companies, or the securitization of risk in the capital markets - which can be used to fund risks that cannot find coverage in the traditional market.

Thus another possible outcome of a hard market could be banks' deepening involvement in risk securitization in the capital markets, Mr. Overholt said.

"Banks are in the business of securitizing a variety of things" and have been increasing their involvement, he said. A hard market, when traditional insurance is scarce, might provide an opportunity for banks to re-package risk in capital markets transactions, he said.

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