Commercial insurance premiums should begin increasing within a year, according to separate studies by Advisen Ltd. and Towers Perrin, the beginning of what could be an extended “hard market” made longer than usual by insurance carriers hoping to recoup losses in the investment markets last year.
Commercial insurance prices dropped 5 percent in the third quarter of 2008 compared with a year earlier, according to Towers Perrin, but the Stamford-based insurance consultancy predicted that will soon change.
“We ”¦ expect to see abatement in soft market conditions in the U.S. as companies consider a number of factors in their pricing decisions,” said Jeanne Hollister, Towers Perrin”™s property and casualty insurance practice leader for the Americas, in written comments. “In our view, the industry is fast approaching a point where the underwriting results are no longer favorable relative to economic hurdle rates, and that generally signals a tipping point in terms of companies”™ pricing actions.”
Investment losses were compounded by a sharp increase in reserves for expected claims on executive liability insurance in the wake of the mortgage meltdown and subsequent credit crisis; and claims for natural catastrophes in 2008 that exceeded payments in the previous two years combined.
“In years past, insurance companies recouped underwriting losses with investment income, but in 2008 the combination of underwriting losses and material investment losses means a five-year soft market is coming to an end,” said David Bradford, executive vice president of the New York City-based Advisen, in a written statement. “The global recession may delay the return of hard market conditions by keeping demand for insurance down, but once the hard market sets in, it is likely to last longer than was the case in recent cycles.”
In the United States, the rates carriers pay for reinsurance on catastrophic risks escalated 11 percent on average for policies that renewed on Jan. 1 and remains highly volatile, according to Guy Carpenter & Co. LL.C., a New York City-based subsidiary of Marsh Inc. The brokerage said that was a smaller increase than the hikes that followed Hurricane Katrina in 2005; the 2001 terrorist attacks; and Hurricane Andrew in 1992.
“Price increases at ”¦ renewals have been tempered somewhat by large capital positions, which have enabled carriers to absorb the year”™s losses,” said Chris Klein, global head of business intelligence at Guy Carpenter, in a written statement. “We have seen wide differences in pricing, dependent on a number of factors, such as loss history, geography, and line of business. At the same time, the expectation of another above-average storm year and the ongoing credit crisis underscore the need for disciplined capital management in the coming year.”
Any increases would come on the heels of two years of record insurance carrier profits, according to Advisen. Through the first three quarters of 2009, carrier profits were down 85 percent from a year earlier according to A.M. Best, an insurance research firm based in New Jersey. A.M. Best has projected that carriers will have a loss on their underwriting results in 2008, the first in three years.
If there is a bright spot for insurance buyers, it is the global recession could suppress demand and temporarily keep prices lower until business conditions accelerate ”“ and businesses have repaired their bottom lines.
