Survey: This Insurance Market Has Legs

"The survey helps confirm our view that even if rates begin to decelerate, they will continue to rise throughout 2003 and into 2004, especially for the longer-tailed liability lines," the survey authors wrote.

Fox, Pitt, Kelton found that the current cycle is a sharp contrast to the one in the mid-1980s, when "rates rose dramatically for a little over two years, from late 1984 through early 1987, but then flattened and started to fall by the spring of 1987."

But the current cycle, the study noted, already has had a much longer duration, and evidence suggests that the decelerating rate phase will not turn into a declining rate phase until 2004 at the earliest.

"Rates are still rising at close to 20 percent across the commercial lines," the study said. The survey also found that the majority of agent respondents believe the market will continue to be "somewhat hard" for the next year, while some agents said they believe the market will be "neutral to soft" one year from now.

Looking more closely at rate increases, some of the large brokers have indicated in the survey that accounts that faced 50 percent rate increases in early 2002 have been witnessing "substantially lower" increases this year.

Fox, Pitt, Kelton noted that the 20 percent rate increases across the commercial lines is below the peak of 25 percent recorded last fall, but still on par with results from spring 2002. The trend was similar across all lines, the study found, with more slowing seen in commercial property, but almost no deceleration at all in directors and officers liability.

The largest increase, the survey said, was found in medical malpractice, with a 42 percent rate increase, with directors and officers coming in second with 31 percent.

Another possible indication that the pace of rate increases may be slowing is that in the latest survey, three respondents, two in commercial auto and one in worker's comp, actually said rates were falling in commercial lines.

Last year, no one in the survey had observed falling rates. Other respondents also observed that the hard market is now "more relaxed versus the fourth quarter of 2002," and "soft on good business," and "hard but softening," which all suggest that the p-c insurers are past the peak in price increases.

But some comments also indicated that in long-tailed liability lines, there is still some more distance to go in the current cycle. One agent respondent, for example, noted that his workers' comp book indicates that "a lot more rate" is needed.

Fox, Pitt, Kelton suggested that commercial auto seems to behave "somewhat as a leading indicator" of rate movements.

The study pointed out that commercial auto was the first line to show actual rate jumps in late 1999. And in the investment bank's reserve studies, it was the first line to show overall adverse development in its reserves and was also the first to show the greatest reserve improvements from 2001 to 2002.

"Commercial auto rates are still moving up," the study said. "But we would watch this line for early signs of softening in the market."

The study also found that personal lines are showing similar decelerating trends as well. Homeowners, which recently had some "dramatic increases," now seem to be easing somewhat, the survey found. The issue of deceleration in rate growth is less relevant for personal auto, since this line never reached double-digit rate increases as other lines have.

Some of the factors behind this persistent hard market, Fox, Pitt, Kelton stated, include renewed loss-cost inflation, reserve problems, the 9/11 event, lower interest rates, and weak equity markets–which all worked to reduce capacity.

Another survey finding that may signal the slowing in rate increases is that a fewer number of respondents said new business prices are running higher than renewal prices.

In the latest survey, 66 percent of the commercial lines responses across all lines indicated that new business rates are higher than renewals. This 66 percent rate, the survey said, is down from 78 percent last fall and 71 percent in spring 2002.

"We generally view this ratio as one that correlates with the hardness of the market," Fox, Pitt, Kelton said. The reason is that during the hardest markets, insurers are focused on re-underwriting their existing book of business instead of adding new ones. So, when the market softens, more companies are willing to write new business, lowering the prices for new business to the level of renewal prices.

Separately, another recent figure that points to the slowing of rate increases comes from Marketscout, an online insurance exchange based in Dallas. According to its monthly review, the overall nationwide increase of commercial p-c insurance premiums was only 18 percent in May, which is characterized by Marketscout as a "tight" rather than "hard" market.