Commercial Insurance Rates Locked Into Softening Mode For Next Few Years

The current p&c soft market will not turn hard until the industry experiences a reserve deficiency, negative operating profits and adverse development, Morgan Stanley said, suggesting that this will likely not happen until 2013.

An industry-wide drop to negative operating profits "requires profitability to shrink by $50 billion from underwriting losses," such as from a natural or man-made catastrophe, social inflation, unforeseen product losses or a combination of these factors, the firm said.

Morgan Stanley analysts see property and casualty pricing down about 1 percent in 2010 and 2011–a 4 percent decrease in commercial lines, offset by a 3 percent increase in personal lines.

Right now the industry has plenty of capital, reserve redundancy and operating profits, Morgan Stanley said. The firm's outlook for investors puts p&c excess capital at more than $100 billion–an all-time high, according to Morgan Stanley.

BAROMTER RESULTS

While premium rates remained soft last month, price declines continued to show some signs of easing up, with decreases in the low single digits, according to MarketScout's June survey.

The Dallas-based electronic insurance exchange's monthly "Market Barometer" showed commercial insurance rates falling overall by just 3 percent for the second month in a row–half the average drop last year at this time of 6 percent.

"Halfway through 2010, it appears the U.S. property and casualty market is stuck in a moderating but continuing soft market," said Richard Kerr, founder and chief executive officer of MarketScout, in a statement.

"A good measurement of market position for the balance of this year will be the composite rate for July, as it is the second largest renewal month each year," he noted.

Mr. Kerr pointed out that the two largest commercial market segments–commercial property and general liability–had average decreases of 4 percent. Commercial property declines remained the same on a month-to-month basis, while general liability moderated a bit from May's 5 percent decrease. Other lines, he noted, remained at the same level as May or shifted by one percentage point.

"Crime coverage actually increased 1 percent, perhaps because of increased losses [that] may have developed throughout the economic downturn," Mr. Kerr suggested. Crime insurance rates had been flat in May.

Among other lines, umbrella/excess, commercial auto and workers' comp went from an average drop of 3 percent in May to 2 percent in June, while fiduciary liability rates softened from an average cut of 1 percent in May to 2 percent last month.

Examining account size, only large accounts remained unchanged on a month-to-month basis, down 4 percent. Small accounts went from a 2 percent drop in May to 3 percent in June, while medium-size accounts were down 2 percent in June, compared to 3 percent in May.

Jumbo accounts of more than $1 million in premium went from an average rate cut of 5 percent in May to 4 percent last month.

The National Alliance for Insurance Education and Research conducted pricing surveys used in MarketScout's analysis of market conditions, which "help to further corroborate MarketScout's actual findings, which are mathematically driven by new and renewal placements across the United States," the firm explained.

In an analyst's note on the MarketScout report, Meyer Shields of Stifel Nicolaus said the outlook for commercial lines insurance is viewed as "mostly negative," but he is bullish about personal lines insurers.

Explaining the more positive outlook for personal lines, he said rates are rising above inflation, and the bigger insurers in the personal lines market will be using economy of scale to gain more business. Profits for these insurers have also not been "unduly boosted" by reserve changes, he added.

He also said that the big insurance brokers–Aon, Marsh and Willis–should begin to see improvements as the recession eases and soft market pressures diminish, translating into organic growth at the firms.

AON REPORTS

Reports from other organizations confirmed the soft market trend. A study by Aon found continued downward pressure on pricing for the first quarter of 2010 among commercial and large accounts.

The Chicago-based broker said that in three separate segments–property, casualty and directors and officers liability coverage–prices were falling for large-account segments with little evidence of a turnaround anytime soon.

For property coverage, capacity remains ample and could increase, according to Aon's "U.S. Quarterly Market Overview" (available at http://bit.ly/buo1kU). Limits remained unchanged, as did deductibles and retentions, according to Aon, which said buying patterns are not expected to change.

On the casualty side, pricing is decreasing in the low single digits and is expected to remain flat. However, carriers with difficult risks may pursue increases where they perceive limited competition, Aon predicted. As with property, insureds are maintaining limits and the vast majority has not changed deductible or retention levels, the broker noted.

Carriers are exerting some underwriting discipline when it comes to emerging risks, but coverage enhancements exist, Aon said.

Discussing D&O coverage, the report said rates were down an average of more than 15 percent in the first quarter and, like the other lines examined, insureds maintained limits.

Restrictions were placed around emerging risks, a practice that is expected to continue through this year.

Capacity rose close to 2 percent in the quarter and new entrants are expected, resulting in increasing capacity through the rest of the year.

"In the current pricing environment, there does not appear to be any real financial imperative for insureds to 'voluntarily' increase retentions," the report said. "Until the D&O market begins to tighten, we do not expect underwriters will have the leverage to increase retentions they deem inadequate. However, when the time does arrive, adjusting retention levels would offer insureds a mechanism to minimize price increases."

Meanwhile, aviation insurance rates are softening, showing signs of moderation after hardening last year, according to a separate report by Aon. Based on 16 of 35 expected July renewals, "the airline insurance market is softening," the broker said.

Aon said current data indicates average fleet value and passenger numbers have increased in line with the year-to-date trend. Yet despite this growth, premiums remained flat for the month, "suggesting in real terms the cost of insurance is actually falling in many cases," the broker noted.

However, Aon warned that "it only takes a relatively small number of incidents in the airline industry for the loss levels to rise significantly," with price hikes likely to follow.

COST OF RISK DOWN

The latest studies on the buyers' side confirm soft market trends. A new report from the Risk and Insurance Management Society said the average total cost of risk per $1,000 of revenue in 2009 fell more than 3 percent due to lower insurance costs and lower risk management administrative costs.

The "2010 RIMS Benchmark Survey"–three separate surveys combined into one book–found a drop in insurance premiums was the largest contributor to last year's lower total cost of risk (TCOR), which represents the total cost of insurance premiums plus retained losses, in addition to internal/external risk control costs.