While Rates Should Increase in 2012, Growth Will Prove Challenging

Anumber of recent reports conclude that commercial-insurance rates were up in 2011's fourth quarter and are likely to remain in positive territory through 2012. But factors such as macro-economic conditions and loss-cost trends will limit insurers' ability to generate underwriting profits, and carriers will have to look elsewhere—for example, mergers and acquisitions or launching new products—to achieve growth for the year.

The Council of Insurance Agents & Brokers' fourth-quarter survey of member insurance brokers, released Jan. 24, showed that prices rose 2.8 percent compared to -5.4 percent for Q4 2010.

“The market continued its upward momentum in the fourth quarter,” says Ken A. Crerar, the Council's president and CEO. “Capacity was still strong, but prices rose in the face of declining underwriting profitability, dwindling reserves and huge [catastrophe] losses.”

All three account sizes displayed increases in Q4, compared to the previous quarter in which only small and medium-size accounts increased.

Small accounts rose 3.1 percent in the fourth quarter of 2011 compared to 2.1 percent for the third quarter. In the 2010 fourth quarter, rates for small accounts fell 3.8 percent.

For medium-size accounts, rates increased 3.5 percent after coming in at 1.1 percent for the third quarter. Fourth-quarter 2010 rates came in at -5.6 percent.

Large accounts were up 1.8 percent in Q4 2011. In the third quarter, rates stood at -0.6 percent, while for the fourth quarter of 2010 rates were -6.7 percent.

Workers' Comp rates have been on a steady rise during all of 2011, starting off last year at -1.6 percent and moving into positive territory in the second quarter at 2.6 percent. By the third-quarter survey, rates rose 4.1 percent before finishing the year up 7.5 percent.

Rate increases on Commercial Property accounts were not far behind, coming in at 5.7 percent. They, too, showed steady increases during the year, at 3 percent for the third quarter and 2.2 percent in the second quarter. (Rates started out 2011 at -2 percent.)

Other lines of business that ventured into positive territory include Commercial Auto, General Liability, Umbrella, Business Interruption, Construction, D&O Liability, Employment Practices Liability and Surety Bonds.

Looking ahead, Meyer Shields, an analyst with Stifel Nicolaus, says rate increases for 2012 could be as high as 10 percent if a handful of negative pressures continue to impact insurers' earnings. Those include global natural and man-made catastrophe losses, loss-cost inflation from 2011 catastrophes, catastrophe-model revisions and worsening core-underwriting results.

But Shields notes that recent commercial-rate improvement “shouldn't benefit carriers' underwriting margins yet, as loss-cost inflation is still outpacing rate increases.”

Keefe, Bruyette & Woods, in its Jan. 23 “Monthly Deductible” report on the P&C industry, agrees that the industry will see positive rate momentum in 2012. But KBW notes that insured-exposure growth will not likely be a contributing factor to premium growth because economic fundamentals remain weak.

Additionally, similar to Shields' assessment, KBW says it expects loss-cost trends to “closely follow rate increases, resulting in little improvement in underwriting results.”

Yet another report, this one from Deloitte, also suggests that P&C insurers will benefit from rising prices in 2012, but says that economic, regulatory and other challenges mean carriers will have to find creative ways to generate growth during the year.

While the other reports focus on insurance in the U.S., Deloitte's report, “2012 Global Insurance Outlook,” looks more globally and notes that U.S. and Western European economies are still struggling and that low interest rates in the U.S. are putting a damper on investment income.

Yet, the report notes, “even in such uncertain economic times, there are opportunities to generate profitable growth by attracting new customers as well as taking market share away from competitors.”

Regarding emerging markets, Deloitte notes that Brazil has seen strong economic growth fueled in part by a “young population that is increasingly in need of financial products and services.”

The Asia-Pacific region, Deloitte adds, is “already an attractive target for carriers, accounting for 23 percent of global M&A insurance activity in the first half of 2011, up from 12 percent in fiscal-year 2010 and fiscal-year 2009.

On the issue of M&A, Deloitte says the time “appears to be ripe for more consolidation” in the industry due to excess capital, bargain pricing and low returns.