Commercial insurance buyers are likely to enjoy another year of favorable pricing, according to a new report from Advisen, although the monthly “Market Barometer” survey indicates that rate cuts in certain key lines are either flat or moderating.

“It's increasingly looking like the soft market's going to continue, at least well into 2011, unless something rather dramatic happens,” Dave Bradford, an Advisen executive vice president and author of the briefing, told National Underwriter.

Does this mean more good deals for commercial lines buyers? “Absolutely,” he said, “at least through 2010. There's nothing right now that suggests pricing is going to harden any time in the foreseeable future, but there are too many moving parts to project it out too far.”

While commercial insurance writers and brokers have seen their bottom lines hit by the combined impact of depressed rates and declining insurable exposures resulting from the global recession, insurers will nonetheless post a profit for 2009, and most carriers are not withdrawing capacity, according to the Advisen report–”The Insurance Market in 2010: The Lingering Impact of the Recession on Capacity and Pricing,” sponsored by FM Global.

The report (available at http://corner.advisen.com/reports_topical_planning_2010_home.html) found that capacity for insurance is abundant in most lines, but demand for coverage has been diminished due to the ravages of the recession, including millions of layoffs, the closing of companies and a depressed number of new startup businesses.

“Decreased demand as a result of the damaged economy will keep rates from rising in 2010,” Mr. Bradford said in a statement. He added that premium volume “for lines of business that are based on factors such as payroll and revenues will continue to be suppressed by the lingering impact of the recession. It is going to be a challenging year for insurers, and especially, brokers.”

As premium volume falls, insurers seeking to deploy their excess capacity are considering new avenues for growth, the study found. “The continuing soft market further encourages insurers to introduce new products and move into new markets,” Mr. Bradford said.

However, he warned, while “new products and markets can provide new revenue streams, they can also cause erratic insurer results.”

The good news is that with several exceptions, property and casualty insurers were largely unscathed by investment losses directly attributable to the meltdown of the subprime mortgage market in 2007, the report found.

Economists generally agree that the recession has ended, but recovery will be slow. Unemployment is stuck at just below 10 percent, while business bankruptcies are well above long-term averages.

As a result, the commercial lines insurance industry has seen revenue fall with little hope of a material rebound in 2010, Advisen noted in its report.

Additionally, the soft phase of the insurance pricing cycle shows few signs of loosening its grip. The average commercial lines premium fell about 2 percent in 2009, and likely will fall by a similar amount in 2010, Advisen reported.

Brokerage firms, which derive most of their revenue from commissions on insurance premiums, have been especially challenged by declining written premium, Advisen pointed out. Organic growth turned negative during the first three quarters of 2009, although profitability remained relatively stable for the largest firms, the report noted.

Advisen sees continued soft market conditions as the most likely scenario for 2010. The recession will suppress demand for insurance capacity and as a result, the market will remain comparatively overcapitalized. Some policyholders will see modest rate increases, but on average rate levels will erode slightly in most lines, the report indicated.

But while commercial insurance buyers can plan on a competitive insurance market for 2010, the seeds of the next hard market are being sown, and above-average catastrophe losses could contribute to a quick reversal of the market cycle, Advisen suggested in its report.

The inevitable hard market may begin to emerge as early as 2011, Advisen predicted, while noting that in the absence of large catastrophe losses, the sudden and severe premium hikes that characterized the 2001-2003 hard market are unlikely to be repeated. Rather, Advisen's forecast is that rates will rise slowly and erratically.

How high rates rise, and how long the hard market persists, will depend in part on how much new capital is attracted to the market, according to the report, noting that insurers already have successfully raised funds in the depths of the soft market, which suggests that abundant capital is waiting in the wings.

The wild card in the market cycle, as always, is catastrophe losses, Advisen pointed out. One mega-catastrophe, such as another Hurricane Katrina, or an accumulation of smaller catastrophes could soak up excess capacity and contribute to a turn of the market in all lines of business, the study reported.

So far, 2010 is shaping up as an active and expensive year for natural catastrophes, according to the report. Nonetheless, it would take an exceptional level of catastrophe losses to trigger the type of sudden and sharp market rebound that was seen in 2001-2003, Advisen said.

LATEST BAROMETER

Meanwhile, MarketScout, the electronic insurance exchange, said its composite rate for U.S. p&c insurance coverage was down 4 percent in March, compared with a “Market Barometer” reading of 5 percent a month before, and 8 percent in February 2009.

Workers' comp is the line to watch as rate declines there are moderating, noted Richard Kerr, chief executive officer of Dallas-based MarketScout, in a commentary issued with the monthly survey results.

“Including data from across the United States, the rate for workers' comp was down 2 percent in March as compared to down 5 percent in February,” he pointed out. “This is a significant month-on-month movement. If workers' comp premiums continue to moderate over the next several months, it will be a clear sign that comp insurers are beginning to increase premiums.”

Mr. Kerr noted that in April, the National Council on Compensation Insurance will publish new data outlining insurer results for 2009, which “may give us additional indications of what we can expect for comp pricing for the rest of 2010. We will be watching carefully.”

MarketScout found that directors and officers liability and surety rates were flat, which means policies were renewed with no rate increases or decreases.

Bigger buyers from jumbo (down 6 percent) and large accounts (down 5 percent) continue to see the greatest rate reductions, while medium-sized (4 percent) and small (3 percent) accounts did not enjoy rate cuts as large, on average.

Rate cuts moderated for energy manufacturing and public entities. All other industry classes maintained the same rate position as in February, according to the survey, which included data supplied by the National Alliance for Insurance Education and Research.

MarketScout said these National Alliance surveys help to further corroborate MarketScout's own findings, which are mathematically driven by actual new and renewal placements across the United States.

Average rate reductions by coverage class were:

General liability–5 percent
Commercial property and business owners policies–4 percent
Business interruption, commercial auto, inland marine, professional liability and umbrella excess–3 percent
Workers' comp–2 percent
Employment practices liability, fiduciary and crime policies–1 percent
Directors and officers liability and surety–zero percent

Special Reports /

Buyer&#039;s Market Will Persist Into 2011, But Rate Cuts For Key Lines Moderating

Related Stories

Recommended For You

Buyer's Market Will Persist Into 2011, But Rate Cuts For Key Lines Moderating