represent an adequate price to cover the ultimate loss.
From my point of view what we are experiencing with virtual certainty is the transition from a hard market to a soft market. Where we are right now, as previous speakers have noted, is a situation with general reserve redundancy and price adequacy but with all those indicators now heading in a negative direction.
McDONALD: Let’s go to our other primary multistate writer. Stan Starnes, what are you seeing in terms of the competitive environment and what do you think about each day when you look out at your business?
STARNES: As you evaluate this business I think you have to recognize that every state is indeed a different business. If you write say business in 50 states you’re in the 50 different businesses and you have to accommodate the nature of each state in deciding what business you’re going to write and how you’re going to execute that business.
The difficultly that every carrier faces today are the challenges that are created by the confluence of a soft insurance market, a low interest rate investment environment and a great uncertainty as to the consequences of health care reform, when and if it passes.
Each of those three things has a direct impact on our future, both near-term and long-term future. It is in evaluating each of those things and attempting to maintain the prudence and the rationality in our operations in which we will either succeed or fail. All of those things mean that it is more important than ever that we remain very adequately reserved and, if we walk away from inadequate rates, that we are in a position to fulfill the promises we make to our insureds, which, in our long-term business will have to be met four or five or six years from now. So I think it’s acutely important that we keep all of that in mind and recognize that we are operating today in an ever more challenging environment created by those very unique conditions.
McDONALD: Marc Zimmermann from API, I’m going to ask you a similar question but could you start out just by explaining for people who are not in Texas what makes your environment a little bit different in terms of reform and how that’s affected the market and then go into what you’re seeing through your company’s eyes?
ZIMMERMANN: In regards to Texas, tort reform is a little bit different than what you’ve seen on a national level. We a cap on noneconomic damages but what’s important in our reform is it’s a constitutional amendment that was voted on by popular election. So that obviously makes it more difficult to overturn and while it’s seen its recent challenges - in the foreseeable future we do not see any meaningful attacks against it. As we look at our state and we look at what we’ve been able to do, post-tort reform, most of the carriers have performed very well. The companies have produced exceptional combined ratios, driven by reform, which has resulted in favorable development of reserves. Soft markets do vary by state, also in regard to the timing of rate decreases. We’ve seen substantial capacity through increased competition in Texas. Currently physicians have multiple options at renewals. What we saw immediately before and then directly after the passage of tort reform was a significant increase in the number of claims reported, then a significant drop in the number of claims. Then rate decreases peaked in 2005, 2006 and 2007 and have begun to moderate. But we are seeing a lot of aggressive pricing by carriers out to win market share, bordering on irrational. Several competitors are booking their current accident years at low levels and writing at low-level prices, which doesn’t leave much room for error in your pricing given the long-tail nature of the MPL line of business. I use the housing analogy. If your financial model includes the thought that housing prices are going to continue to go up and they don’t and on the flip side of our business, if you assume that claim counts are going to continue to stay low and severity is going to continue to stay low and they don’t, that’s a recipe for disaster long-term.
McDONALD: This is probably a good point to interject a question that we received a gentleman who identifies himself as a broker and a former VP of claims. He points out and this has been mentioned already that’s he’s been through three med mal crises and keeps hearing that the hard market is coming. But he sees no signs of it. He understands that people are saying that it’s going to happen. But he’s seeing no evidence of it.
Let’s start with Chad. Are you seeing any evidence that there’s a hard market imminent or is it just something that people are still talking about but not seeing?
KARLS: I was asked that two years ago by a client, when would the hard market return? I said June 13, 2010. I think that answer is going to turn out to be way too early. Because I think it’s going to be a little while yet. I think there are signs. The underlying cost structure will facilitate the onset of the hard or at least stop the softening of the current market if you will. What I’m referring to here is that we have seen in a few places, not universally, but we have seen in a few data sets what looks to be a rebound in the claim frequency. Now it’s not to the levels of where it was in say 2001, 2002 necessarily but we are seeing enough signs, frequently enough that perhaps claim frequency might have bottomed out or at a minimum plateaued and may be on its way back up.
So that, combined with what’s been mentioned already several times, that combined with the continual