Towers Perrin Finds The Market Not So Soft

MarketScout 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 said the average price decline was 13.3 percent for the third quarter of 2007.

Towers Perrin said while prices fell in all surveyed lines, both the directors and officers liability (D&O) and employment practices liability lines realized the greatest 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.

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, 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 decreases in prices 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, 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 and use this information to analyze insurance company performance and financial security, and said it is critical that these audiences have access to accurate data.

CLIPS results for the full-year 2007, reflecting fourth-quarter survey data, are expected to be available in mid-March 2008.

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 said.

Agent data, she continued, 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."