Rates Up in Q2, But How Strong Is Pricing Momentum?

"There's no doubt it was a tougher market for buyers the last three months than the quarter before," CIAB President & CEO Ken A. Crerar says in a statement. "Rates continued to climb as insurers tightened reins on underwriting. More business was being pushed into the surplus-lines market as carriers pulled back on capacity, particularly for catastrophe exposures."

Robert Hartwig, president of the Insurance Information Institute, says the report is further indication that rates are increasing—but at a flattening pace.

"The fundamentals in the market are such that they suggest pricing does need to continue to firm, but there are no catalysts in place for a traditional hard market," says Hartwig, who defines a hard market as price increases in the double digits.

One element that's keeping the industry from moving into a robust hard market, he says, is plentiful capacity, despite last year's catastrophe losses.

However, several lines of business, according to the report, are showing signs of greater increases. Hartwig notes Workers' Compensation, Property and D&O as three of those lines.

Of the brokers surveyed, 33 percent say their clients' rates rose in the range of 10-20 percent for Workers' Comp. Twenty-seven percent of brokers say clients' rates rose by double digits for Commercial Property, and 14 percent say clients saw double-digit increases on their D&O coverage.

Hartwig says Workers' Comp needs to harden because combined ratios are well over 100, and with investment yields low, "it will take years to turn around that line."

The CIAB's survey is only one of a few recent reports, along with earnings releases, to indicate that rates are on the increase, but James B. Auden, managing director at Fitch Ratings, says, "We wonder how much momentum there is."

He says that industry fundamentals; low interest rates producing small investment yields; and declining favorable reserves would indicate increases going into at least early next year, however.

While the industry is likely to see a much narrower underwriting loss than last year, assuming normal catastrophe losses, Auden says that until the industry gets to a combined ratio in the mid-90s, insurers will not return to underwriting profitability.

"The current rate improvement is more in reaction to recent losses than a change in competitive dynamics," says Auden. "We don't know if the current market has enough momentum to get back to [the hard market of the mid-2000s] because of competitive factors and the amount of capital deployed in the P&C business."

MARKETSCOUT: RATE-FIRMING CONTINUES

MarketScout reports that commercial- and personal-lines rates continued to firm in July as all lines of business in both sectors increased by single digits compared to the same month a year ago.

The Dallas-based online insurance exchange reports in its monthly Market Barometer that composite commercial-line insurance rates increased by an average of 4 percent for the third month in a row in July.

MarketScout CEO Richard Kerr notes that Property rates rose the most in the month, climbing 6 percent compared to July 2011.

Business Interruption was up 3 percent compared to 2 percent the previous month, according to the report. Business Owners Policy (BOP) was up 5 percent compared to up 4 percent the previous month.

Also up were:

• Umbrella Excess—up 4 percent compared to 3 percent in June.
• Commercial Auto—up 5 percent compared to 4 percent in June.
• D&O Liability—up 3 percent compared to 2 percent in June.
• Employment Practices Liability Insurance (EPLI)—up 3 percent compared to 2 percent for the previous month.

While the Market Barometer measures rates compared to the same month a year ago, Kerr notes that rates also saw month-to-month increases in Business Interruption, BOP, Excess Liability, Auto, D&O and EPLI.

Commenting on the results in an analyst's note, Stifel Nicolaus' Meyer Shields says, "We see insurers' deteriorating calendar-year results as the primary catalyst for rate increases, and we expect these increases to accelerate as favorable reserve development subsides and accident-year results edge worse."