Soft Market Deepens During First Quarter

The buyers market has not only continued into 2008 but accelerated, with the average commercial insurance rate decline deepening by 1.5 points to 13.5 percent for the first three months of the year, according to the Council of Insurance Agents and Brokers.

The CIAB's quarterly survey found the soft market firmly entrenched, as none of the 119 broker respondents reported an up-tick in rates for accounts of any size.

For the first quarter, the average decline in rates for small accounts (commission and fees of less than $25,000) stood at 10 percent. Midsize accounts (between $25,000 and $100,000) saw rates fall an average of 14.7 percent, while large accounts (above $100,000) experienced the steepest drop at 15.7 percent.

The overall rate cut was 1.5 points deeper than the fourth-quarter average of 12 percent, with the trend holding across the board compared to small accounts (8.4 percent in the fourth quarter, now 10 percent) and both midsize and large accounts (13.8 percent late last year, compared to 14.7 percent and 15.7 percent today, respectively).

Among some of the lines highlighted by the CIAB survey, commercial property showed the sharpest decline–14.8 percent (1.8 points deeper than 2007's fourth quarter). This was followed by general liability (13.6 percent–0.6 points deeper) and umbrella (11.1 percent–2.4 points deeper).

The vast majority of brokers said rates on their accounts were down between 1- and 20 percent. On small accounts, 78 percent of brokers said rates dropped in that range, while 74 percent of those surveyed put the decrease in that range for their midsize accounts. Sixty-two percent of brokers said their large accounts fell in that range.

None of the brokers reported rate increases.

Again, bigger is better if you are a commercial insurance buyer in this market, the survey found. While only 6 percent of brokers said small accounts enjoyed rate decreases between 20- and 30 percent, 20 percent said medium-size accounts dropped 20-to-40 percent, while 30 percent of large accounts saw decreases in that range.

CIAB's report was referenced during a financial analyst's conference call last week to illustrate the soft market pressures on Daytona Beach, Fla.-based insurance brokerage Brown & Brown.

J. Hyatt Brown, B&B's chairman and chief executive officer, said his firm is experiencing many of the anecdotal observations about the market mentioned in the report. He noted that insurers are hungry to capture market share and are seeking to write more classes of business normally placed in the surplus markets.

“The companies are still making [a lot] of money,” said Mr. Brown. “As long as that continues, this [soft] market is going to continue.”

Meyer Shields, a financial analyst with Stifel Nicolaus, said in a note to investors that “rate decreases will ultimately continue beyond the point of making economic sense, but even with accelerating decreases, we don't think we are at that point yet,” based on the solid underwriting profits insurers are reporting. He added that in the commercial space, “specialty underwriters have a credible claim to underwriting discipline.”

The report is worse news for brokers, he continued, predicting that Aon, Marsh and McLennan, and Willis will only see growth from international business and margin expansion, while Hilb, Rogal & Hobbs has positive earning prospects from expansion in London and the large corporate account space.

Meanwhile, reinsurance rates for U.S. risks are expected to continue to see a downward plunge as capacity keeps rising, according to a report by Aon Re Global.

Midyear reinsurance renewal rates for the June 1-July 1 period are expected to continue to soften, while terms and conditions are also expected to see improvement for customers, Aon Re said.

“Supply continues to grow at a faster rate than that of cedent demand, which implies continued softening,” Bryon Ehrhart, president and chief executive officer of Aon Re Services, said in a statement.

For the United States, personal lines nationally are expected to see rate declines between 10- and 15 percent, while U.S. regional personal lines decreases are expected to be as high as 15-to-25 percent.

U.S. standard and complex commercial lines are expected to experience decreases in the 10-to-15 percent range, Aon Re said.

Aon Re said it would take a catastrophe insurance loss in the range of $30-to-$50 billion to change the direction of property-catastrophe reinsurance rates, terms and conditions.

Among some of the reasons for the declines cited by Aon Re:

o Low severity of property-catastrophe losses over the past two years.

o Up to 20 percent returns on equity.

o Stability or anticipated drops in key U.S. perils of property-cat loss models.

o Limited impact on most reinsurers from the subprime crisis.

o Increased interest on the part of capital market investors to invest in alternative risk-transfer vehicles.

The report added that “a substantial majority of the world's largest property insurers now utilize risk-transfer capacity through sponsorship of catastrophe bond transactions.”

This represents 10-to-30 percent of program capacity for insurers buying more than $500 million of coverage for peak reinsurance aggregate zones–a trend that's expected to continue, Aon Re said.

o 15.7%–Average rate cut for accounts with commission and fees above $100,000.