Update: Arthur J. Gallagher Exec Advising Ranks to Anticipate Underwriting Pressure

(Corrects the title of Jim Gault , who is president and chief operating officer of retail P/C brokerage operations at Arthur J. Gallagher & Co., in the second paragraph and the headline). Jim Gault is telling his brokers to expect a push back from underwriters on those accounts that have a less-than-stellar risk profile. While a good risk may get a rate reduction, he doesn't think it will necessarily be a big one.

Gault, president and chief operating officer of retail P/C brokerage operations at Arthur J. Gallagher & Co., said economic drivers within the market will force carriers to place more emphasis on underwriting profit as a means of making targeted returns.

"As long as the economy stays the way it is with low interest rates and low expansion, I just think that you're going to see more emphasis on underwriting," Gault said.

Gault was in Vancouver, British Columbia, this week for the Risk and Insurance Management Society's annual meeting.

As pricing pressure builds on property catastrophe coverage, Gault said the market is in a transitional phase as the economy stabilizes.

"Our clients are not shrinking to the degree that they were for the past couple of years," he said. "So exposure units are flattening, and in some industries going up a little bit."

He said he fears that if market conditions turned severe, a client base that is still working its way through the economic recovery phase would simply buy less coverage and shoulder more risk.

"It's one of those things where I think what's best for all of us is to have the market moderate as the economy improves," he said. "Now I don't know if that's really going to happen because you have this whole issue with cat property, which is a problem. Workers' compensation is also a problem."

The combined ratio for the workers' compensation segment was estimated at 117.5 for 2010, according to an A.M. Best Special Report released Feb. 14, 2011. The report projects that the combined ratio will climb to 121.5 in 2011.

Gault said the Itasca, Ill.-based brokerage is anticipating that the workers' compensation market will tighten in states such as California, Illinois and Florida and for clients that don't have a solid track record.

As for growth prospects, he's bullish on anything that's health care-related given the combined effects of an aging baby boomer population and the transition triggered by the Patient Protection and Affordable Care Act.

"Just by virtue of the aging of America it's got to be an area that has wind at its back," he said.

Gault said on an item-count basis, most of Gallagher's clients are in the middle market. While it faces competition in the segment from the likes of Lockton Cos. and Brown & Brown, he said more often than not they are competing against the smaller broker.

"They don't have the depth that we have in terms of consulting and expertise to keep up with the changing landscape of health care" he said. "So we've got some pretty good opportunities there when we compete against local and regional brokers."

Gallagher just closed out a first quarter that included a 10% increase in brokerage revenue, and 1.6% increase in organic growth. There were also four acquisitions that kicked in an additional $27 million in revenue.

"The opportunities to do acquisitions on the P/C side have never been better and it's pretty surprising to me," Gault said.

A late summer ramp-up of merger-and-acquisition activity was fueled along by fear that a long-term capital gains tax of 15% might not be extended and actually increase. It left agencies to decide whether to sell with depressed valuations, or weather the market conditions until revenue returned. When the extension occurred, Gault expected activity to subside until closer the next expiration date at the end of 2012. He said that hasn't been the case at all.

"The flow keeps coming," he said. "I think a lot of them know that they have this two-year window, but they are starting to think to themselves that they are not getting any younger."

Founded in 1927, Arthur J. Gallagher & Co. was the fifth-largest global insurance broker, based on 2009 revenue of $1.7 billion, according to Best's Review magazine's annual ranking.

(By Al Slavin , senior associate editor, BestWeek)