Even though the soft market may be ending, don't expect to see prices rise rapidly and across the board overnight, the chief executive of an online insurance exchange says.

Richard Kerr, CEO of Dallas-based MarketScout–which conducts the monthly “Market Barometer” survey–said the decline in insurance prices will be coming to a halt because rates have become inadequate to cover losses and expenses.

“At the end of every year we calculate the rate adequacy of the property and casualty industry,” said Mr. Kerr. “According to our calculations, the property and casualty rate index fell below 'rate adequacy' in the fourth quarter of 2008. Therefore, we believe this signifies the beginning of the end of the current soft market.”

However, even though “the soft market trend has turned,” he noted, “it may take as much as a year for rates to actually start increasing,” at least on an average, industrywide basis.

A chart released by MarketScout illustrating rate adequacy shows soft market conditions have pushed property-casualty rates down 7 percent below adequate levels in 2008.

A $100 premium rate in 2001, adjusted for inflation, would stand at about $122 in 2008. However, that base $100 p-c rate in 2001, when compared to MarketScout's barometer rate adjustments, rose to a high of $163 in 2004 and dropped to $113 in 2008–or $9 below an adequate rate, adjusted for inflation.

According to MarketScout's analysis, current rates translate into a 13 percent increase since 2001, while inflation costs, measured by the consumer price index, have grown 22 percent.

MarketScout noted that in addition to inflation, there are dozens of actuarial factors to be considered that go into adequate premiums, suggesting the analysis gives only a rough estimate of the degree of rate adequacy.

In its monthly comparison, MarketScout's December “Market Barometer” remained unchanged from November, indicating overall commercial insurance rates were down an average of 9 percent.

By account size, small-account rates (up to $25,000 premium) remained down 8 percent. Medium-size account rates ($25,001-$250,000 premium) were down 9 percent, compared to down 8 percent in November.

Rates for large accounts ($250,000-$1 million premium) were down 9 percent in December, compared to a drop of 10 percent in November. Jumbo accounts (over $1 million in premium) were unchanged from November to December, down 10 percent.

Examining coverage classes, there were no dramatic developments, with nine of 14 classes of business exhibiting a change of one percentage point. But all classes saw rate declines on average in December, ranging from 10 percent (for commercial property and general liability) to 5 percent (surety).

By industry class, there again were no significant changes, with rates down as much as 9 percent for the manufacturing, habitation and service sectors, to as little as 5 percent for the energy sector.

The complete MarketScout barometer report is available at www.marketscout.com.

Special Reports /

Soft Market Over, But Price Hikes Remain Problematic, Survey Finds

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