Price declines for commercial insurance may not be nearly as steep as the double-digit cuts being reported in a variety of industry surveys, according to study by Towers Perrin based on firsthand data from carriers.

The Stamford, Conn.-based consulting firm said it believes it has better data to support its report on quarterly “Commercial Lines Insurance Pricing and Profitability” trends–its CLIPS survey–which found that average prices for all lines of coverage combined decreased only 4-to-5 percent between 2006 and 2007.

Survey data for the third quarter of 2007 indicated an average price cut of about 5 percent, with large accounts and specialty insureds experiencing the largest decreases–nearly 9 percent, on average.

By comparison, MarketScout–an online insurance marketplace–reported a 13.15 percent overall drop for 2007 in its “Market Barometer” survey, while the quarterly survey by the Council of Insurance Agents and Brokers found an average price decline in the fourth quarter of 2007 of 12 percent–slightly improved from the 13.3 percent drop experienced in the third quarter.

The Washington-based CIAB's fourth-quarter “Commercial Property-Casualty Market Survey” also includes anecdotal evidence suggesting that some carriers are beginning to abandon underwriting discipline in pursuit of market share.

CIAB said a number of the 120 brokers who responded to the survey said some carriers are beginning to write lines of business they have not touched in years, while other brokers pointed to loosening terms and conditions in the face of increased competition.

But Jeanne Hollister, managing principal and practice leader for U.S. property-casualty insurance at Towers Perrin, said she believed CLIPS is a better barometer than most surveys, because the data comes out of commercial lines insurance companies' price-monitoring systems.

“My understanding is we've got the only report that has as its source the companies themselves who are underwriting the business,” she said.

The firm does not say exactly how many insurers contribute to CLIPS. It describes participants as a cross-section of U.S. p-c insurers that include the majority of both the top-10 commercial lines companies and the top-25 U.S. insurance groups. The full report is provided only to participating companies.

Ms. Hollister said CLIPS results have consistently indicated a less dramatic decrease in commercial insurance prices than other industry pricing surveys, noting that agent/broker surveys reported price decreases in excess of 10 percent in the third quarter of 2007, compared with the CLIPS' findings of 5 percent.

“Given the insurance industry's aggregate reported premiums for the first nine months of 2007, it seems unlikely that price decreases were as dramatic as those reported in other surveys,” according to Ms. Hollister.

Towers Perrin said while prices fell in all surveyed lines, both directors and officers liability and employment practices liability saw the biggest year-over-year price declines.

Additionally, the survey findings suggested that insurance carriers expect loss ratios for accident-year 2007 to be higher than those in accident-year 2006, as price reductions were not matched by reductions in the expected costs of claims.

Towers Perrin, in a statement, noted that pricing data is a critical component of the information insurers use to develop business plans and anticipate changes in product profitability.

The firm mentioned that investors and regulators closely monitor insurance pricing trends to analyze insurance company performance and financial security, and said it is critical these audiences have access to accurate data.

CLIPS results for full-year 2007, reflecting fourth-quarter survey data, are expected to be available in mid-March.

Ms. Hollister said the firm has several theories why agent-supplied pricing data may be less reliable. She said their figures may not reflect smaller lines of business written by direct-writing companies that don't use independent agents.

That business, she said, is less sensitive than larger accounts to price swings. Agent surveys won't capture business not written by independent agents, while the Towers Perrin survey has some direct-writing companies, she noted.

Agent data, she added, may focus more on business that moves from shop to shop at renewal time–which, according to Ms. Hollister, sees more price volatility.

Further, she said, “we're getting information out of company systems. It's very quantitative and objective. It takes the emotion out of it.”

Asked if lower price decreases meant the softening market would take longer to bottom out, Ms. Hollister noted that publicly traded companies have said they are approaching the market with more discipline and are now equipped with better price-monitoring mechanisms. Without such mechanisms, insurers historically had a problem because “you can't manage what you don't measure,” she said.

Ms. Hollister said commercial insurance–the only sector compared in the report–”are more volatile than personal lines.”

Meanwhile, a separate study by a wholesale brokerage concluded that while property insurance prices are dropping, the movement is a modest market correction, not an out-of-control decline.

The current downward market trends are “a move toward reality-based pricing,” said Edison, N.J.-based NAPCO, in its 2007 “Property Insurance Insights” report.

“We think it would be unwise to view end-of-year aggressiveness as the beginning of a property insurance freefall,” the report said. “Instead, we believe that we are in the midst of a necessary correction to the market's overreaction to [Hurricanes Katrina, Rita and Wilma in 2005], and we are witnessing the efforts of insurers and reinsurers to find the balance between underwriting discipline and returning shareholder value.”

The report said the softening in this sector should continue through the first half.

In catastrophe-prone property areas, rates are down as much as 40 percent, and “we would not be surprised if they were another 15 percent to 25 percent lower in 2008,” said NAPCO.

However, insureds are still paying more for property insurance than prior to Katrina, and the ongoing competition will not drive prices down below pre-Katrina levels, which underwriters deemed inadequate, according to the report.

“Even as carriers are pressured to grow, we suspect that property-catastrophe underwriters will maintain a reasonable level of underwriting discipline,” NAPCO said.

Sophisticated modeling and rating agency requirements, coupled with doubts about investment performance, all point toward underwriters maintaining underwriting discipline on property-catastrophe accounts, NAPCO added. “The days of easy, cheap–and some might say na?ve–catastrophe capacity appears to be a thing of the past,” said the report.

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Might Softening Market Be Firmer Than It Appears?

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