Commercial-Lines Prices Moderating, But Soft Market Hangs On

Small accounts showed an average rate decline of 1.3 percent for the first quarter. From the 2010 first quarter through the fourth quarter, rates were in decline more than 3 percent.

Midsize accounts averaged a decline of 2.9 percent for the first three months of the year, compared to 5.6 percent for the 2010 fourth quarter. Rates declined at around 5.6 percent for all quarters in 2010 except the second quarter, when rates declined 7 percent.

Large accounts declined at a rate of 4.4 percent for the 2011 first quarter, compared to a decline of 6.7 percent for the 2010 fourth quarter. Declines were less consistent in 2010 for large accounts, declining at a rate of 6.6 percent during the third quarter, 8.9 percent during the second quarter and 7.4 percent in the first quarter.

The Council says the survey indicates a slow economic improvement as demand for commercial products continues to pick up. The association says 57 percent of respondents saw an increase in demand compared to 47 percent in the previous quarter's report.

Examining the breakdown of business, commercial property and workers' compensation had the greatest percentage of brokers saying they have seen demand increases.

Twenty-two percent of brokers say workers' comp rates rose 1-10 percent, while 1 percent says it rose 10-20 percent. Twenty-three percent say they saw no change, while 28 percent say rates declined 1-20 percent.

Concerning commercial property, 21 percent of brokers say rates rose 1-10 percent, while 23 percent saw no change and 29 percent say rates were down 1-10 percent.

Ken A. Crerar, president of The Council, says in a statement, "It's too early to tell if the leveling off and modest price increases were a result of the fallout from the recent Japan disaster and other catastrophes earlier this year, or if the market is reacting to broader market conditions."

In Lockton's recent "Property and Casualty Overview," Jim Rubel, executive vice president, director of property and energy for Lockton, says recent cat events "are sending shockwaves throughout the global property-catastrophe market and could lead to restrict capacity and possibly even increase rates."

Lockton's report says rates are now in a state of flux because of the first-quarter catastrophes. Buyers, it adds, "can no longer expect to find a market ready to compete aggressively on price"—and this especially holds true for catastrophe-exposed risks.

On the casualty side, "extraordinary events" have created "uncertainty about the market direction," says the report. But that uncertainty is still dependent on "carrier behavior" as competitors show an eagerness to "provide alternatives" if incumbent insurers seek to increase prices.

Reinsurers are expected to tighten the management of catastrophe aggregate with greater focus. Underwriting discipline will increase for hurricane and earthquake risks as the "market remains decidedly uncertain."

In its "2011 Spring Market Update" report, though, Willis notes that the impact from the earthquake in Japan, as devastating as it was, has had a limited effect on the insurance market because insurance penetration was not that deep. However, a devastating hurricane event in the United States could have a significant impact on insurers because the insurance penetration is deeper, Willis says.

While catastrophes earlier this year had people thinking a market hardening was on its way, the reality has proven very different, says Todd Jones, president of Willis North America. "The property market is shifting, especially for catastrophe risks," he writes in the report. "The overall marketplace appears to be stable, and while softening may slow, no major reversals so far are detected. This speaks volumes about the resiliency of our industry."

Catastrophe-exposed property risks are expected to be flat to a 5 percent increase in the United States, says Willis, while non-catastrophe-exposed property risks could experience decreases ranging from 5-10 percent.

On the casualty side, risks with minimal exposure could see rates that are flat to down 5 percent. On the other hand, risks with increased loss exposure may see rates remain flat to increase by 5 percent.

Directors and officers insurance is expected to remain on the down side, by as much as 15 percent, according to Willis. Covered entities will see coverage enhancements in their policies, among them removal of pollution exclusions, sharp curtailment of the insured-vs.-insured exclusion and personal-liberty protection costs.

Political risk is expected to be flat to down 15 percent. Underwriting of the risk is based on the nation and the perception of risk there. There will be increased attention paid to due diligence and increased focus on structure and security. Risk sharing is also expected to increase between underwriters and insureds, the report says, as carriers will prefer indemnity levels of 60-75 percent.  

The Lockton report notes that insurers' surplus in 2010 was up to $556 billion, increasing by $50 billion from the year before. "The high level of capacity may extend the soft market, despite the high number of cat losses that will begin to have an impact in 2011," the report notes.

A Fitch Ratings review of 2010 also pointed to the high capacity as a reason why the rating agency does not expect an imminent pricing turn, even as the industry faces deteriorating underwriting results.

Fitch's report, "Commercial Lines Underwriting Results," found weakening underwriting results through 2010. "The commercial-lines industry aggregate accident-year combined ratio for 2010 was 103.8," the report notes, "which corresponds with an estimated return on surplus of approximately 4.5 percent."

Fitch adds that the commercial-lines combined ratio has increased by nearly 20 points since 2006. "This decline in underwriting performance is related largely to the cumulative effect of continued premium-rate reductions in commercial lines, as well as adverse effects on insured exposure levels and demand for coverage from the economic recession," Fitch states. "These conditions have led to a decline in premium revenues unseen in the insurance market since the 1930s, which contribute to higher loss and underwriting expense ratio."

Workers' comp saw the most severe underwriting losses, the report notes, with a combined ratio of 113.3. "While the workers' comp line benefited from reform efforts in various states and continued declines in claims frequency, claims severity in this segment has steadily trended upward," Fitch notes. The rating agency adds that revenue was hurt by exposure declines as employment levels and payrolls fell during the recession.

Commercial auto has also seen significant exposure reductions and posted a combined ratio of 103.2 in 2010, Fitch says. Commercial multiperil had a combined ratio of 106.7 for accident-year 2010.

However, Fitch states that past industry cycles have shown that underwriting performance has declined to "considerably worse levels before any material pricing shift ensues."