Despite two major hurricanes and a global credit crisis, the relentless decline in commercial insurance prices continued in the third quarter, according to a survey of insurance buyers.

The Risk and Insurance Management Society Benchmark Survey of policy renewal prices, as reported by North American corporate risk managers, also found that lower insurance industry net income may signal a coming turn in the pricing cycle.

"Frankly, the industry was pretty, and still remains somewhat over capitalized--it was very capitalized," Dave Bradford, executive vice president at Advisen, which conducts the survey, told National Underwriter. "So it's going to take a couple of quarters of losses before we ring out that excess capitalization."

Although he said he was not surprised by the findings, he added he was "maybe a little bit surprised just how much property and general liability had come down--but we were expecting to see some fairly significant softening in this quarter."

Asked whether the stiffening of rates would take time to trickle down from reinsurers, he said, "Actually, I think the insurers are doing a pretty good job themselves of destroying their capital at this point in time."

The likely scenario, he said, is that "around second quarter things will have bottomed out. If the losses continue to mount, we should see some hardening by the end of the year."

He added that although the hardening will most likely happen across all lines of business, "I suspect that D&O [directors & officers liability] will lead the charge back up again, just because it's getting battered so much right now."

John R. Phelps, member of RIMS board of directors and director of business risk solutions at Blue Cross and Blue Shield of Florida, Inc., said in a statement, "It was a rocky third quarter for insurers, but risk managers still saw prices improve on average. It is increasingly clear, though, that premiums cannot continue to fall at this pace, especially with the global economy in chaos."

The survey found that property coverage, with a decrease of 8.5 percent in average premium, and general liability--which fell 9.6 percent--led the market down in the third quarter. The average property premium fell sharply despite as much as $20 billion in insured losses from Hurricanes Gustav and Ike.

The 9.6 percent decrease in average general liability premium is the largest single quarterly drop since 2005, Advisen said.

Triggered by the meltdown of the subprime mortgage market, skyrocketing claims slowed the rate of descent of the average D&O premium, which fell by only 2.1 percent during the quarter.

Excluding financial and real estate companies from the sample, the average decrease was 7.4 percent. The average workers' compensation premium was nearly flat for the quarter, falling only .6 percent.

The crash of stock markets worldwide and a deepening global credit crisis led to investment losses for many insurers in the third quarter. These losses, combined with deteriorating underwriting results driven by falling premiums and mounting claims from the subprime mortgage meltdown and the credit crisis, reduce policyholders' surplus--the capital held by insurers to support underwriting activities, Advisen found.

A period of falling policyholders' surplus should hasten a turn in the pricing cycle. Commercial insurance pricing has been trending downward since the beginning of 2004, Advisen said.

"Nearly five years of deteriorating rate levels are taking a toll on underwriting profits," Mr. Bradford said in a statement, noting, "A.M. Best forecasts a 2008 combined ratio of 104.0 for the commercial property and casualty industry. Together with lower investment returns as a result of the global credit crunch, conditions may be ripe for a reversal in the market cycle in 2009."

The RIMS Benchmark Survey is produced by Advisen, which collects and analyzes the data and provides the technology infrastructure for the survey's online services.

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