The market is continuing to stabilize for corporate buyers, with a growing number reporting flat or declining rates on their latest renewals and expecting more of the same when their current policies expire, according to the survey, sponsored by Zurich in North America.

However, while the hard market might indeed be over, that doesn't mean a widespread soft market has taken its place. Indeed, a significant number of risk managers in all lines reported at least modest premium increases, the survey of 200 corporate customers revealed.

In addition, the market is anything but soft for smaller insureds. The 200 agents and brokers surveyed–representing a much wider array of clients, including small and medium-sized accounts–reported much higher percentages of their clientele seeing premiums rise, with rate hikes far greater on an average basis across the board.

One possible conclusion is that while the age of skyrocketing rates following the terrorist attacks of Sept. 11, 2001 is over, a “rational market” has emerged in commercial lines–one in which loss history still carries a lot of weight and sound risk management makes a big difference.

“Corporate customers and brokers alike agree that the state of the insurance market continues to improve” for buyers, according to analysts at The Response Center, the independent research firm based in Fort Washington, Pa., that conducted the survey on behalf of NU and Zurich.

“Among corporate customers, the mean ratings of market hardness have declined steadily over the past year from 5.08 in Spring 2004 to 4.04 in Spring 2005,” on a scale of 1 to 7, with “7″ being the hardest market, the survey found.

“Compared with 31 percent who rated the state of the market 'very hard' a year ago, only 5 percent do so today–a substantial drop,” said The Response Center. “Most continue to take the middle ground by rating current market hardness a '4' or '5'–68 percent. However, compared with only 18 percent in fall 2004, 28 percent give ratings on the lower end of the scale this spring, roughly six months later.”

Producer ratings of the market are “similar, but less optimistic,” according to The Response Center, “with most agreeing that we are currently in a softening market.” Indeed, the survey told a tale of two very different market experiences, depending on the size of the buyer.

“For corporate customers, premium increases for general business lines of insurance were minimal in the past renewal cycle,” The Response Center noted. “Across all general lines, risk managers experienced only about a 1-to-2 percent increase in premiums, on average. This is a stark difference from increases as high as 13 percent in spring 2004. In fact, the majority reports that premium costs for general business lines either remained the same or actually decreased compared with prices experienced a year ago.”

The survey found that the largest decreases for corporate buyers came in commercial property and property-catastrophe coverage.

Looking ahead, “corporate customers anticipate general business line premiums to be similar in their next renewals to prices seen in this past renewal cycle,” The Response Center reported.

It was a different story for the often-smaller clients of agents and brokers queried, however. Indeed, the producers surveyed “say their clients saw substantial increases–as high as 12 percent–in the past cycle,” The Response Center reported.

“At least six in 10 brokers report that their clients experienced premium increases for general business lines of insurance in this past renewal cycle,” the survey found. “Across the board, increases averaged about 10 percent higher than previous costs.”

However, this doesn't mean the two markets are going in different directions, as rate hikes for all commercial lines customers continue to moderate. The producers surveyed reported “increases are down significantly from hikes of up to 22 percent experienced in spring 2004,” according to The Response Center. Looking ahead, “while brokers predict further increases in the next renewal cycle, the increases are generally not expected to be as steep.”

The Response Center said the fact that risk managers, on average, report a flatter market than do producers surveyed “may well reflect the greater bargaining power of customer respondents' large companies, compared with the broader range of businesses that broker respondents represent.”

In addition, it's important to remember that this isn't necessarily an apples-to-apples comparison between the two responding groups. For risk managers of huge commercial accounts, every percentage point equals a significant amount of premium, while for smaller buyers, even a 10 percent raise might only amount to a relatively small number in dollar terms.

“Risk manager-led accounts are so large that they basically self-rate,” said John Ormerod, director of marketing for global corporate business in North America at Zurich's Schaumburg, Ill., headquarters. “Their premiums are based more on loss history than with smaller commercial buyers, which are more often rated right off the manual. That in itself can create more rate stability for bigger buyers with good loss experience.”

A prime example is workers' compensation, he said. “On large accounts with risk managers, not only is the exposure more predictable because we have a lot more information to work with and a lot more loss control activity in place, but there is a much larger self-insured retention, all of which work to stabilize the premium rate.”

Joe Murphy, senior vice president of marketing operations for Zurich in North America, added that “premiums at smaller accounts–which mostly transfer risk to their insurers–have a tendency to move in line with loss costs, which continue to move north. However, larger accounts in most cases are not just transferring risk–they are assuming a lot of exposure themselves, which has a big impact on what they are charged.”

Greg Maguire, director of the property group for Zurich's global corporate business in North America, pointed out that “in large property risks, the expectations of buyers and brokers are fueled by price decreases of the last two years, which are moderating. They keep pushing the envelope, constantly testing the market for better rates, terms and conditions.”

The story was the same in specialty lines. “For the most part, corporate risk managers experienced premiums that were either flat or a slight increase over previous costs,” The Response Center noted, with the highest increase reported for medical malpractice at 5 percent, on average.

Among agents and brokers surveyed, however, “premiums for nearly all the specialty lines of insurance rated went up in this past renewal cycle, ranging from 5 percent for medical malpractice to 13 percent for D&O,” the survey found. Once again, however, cost increases reported by the producers queried were not nearly as high as those experienced a year ago.

Again, in line with the responses about the standard commercial coverages, risk managers “expect premium costs for the specialty lines to remain the same or decrease in the next renewal cycle,” The Response Center noted. One exception is medical malpractice, which buyers predict will continue to rise by about 6 percent.

However, the producers surveyed “anticipate further increases across nearly all the specialty lines. The majority expect hikes similar to that experienced in this past renewal cycle,” the survey revealed.

When it comes to coverage limits as well as restrictive terms and conditions, risk managers and producers “give varying predictions” for the next renewal period, the survey found.

“Although the majority of each group feel that limits will remain unchanged, significant percentages predict coverage limits will go up for several lines,” including commercial property (25 percent of buyers versus 56 percent of brokers), business interruption (24 percent versus 46 percent) and medical malpractice (19 percent versus 17 percent), The Response Center pointed out.

However, on the negative side for buyers, the survey found that “significant percentages also agree that limits and terms and conditions will be more restrictive for many lines,” including property-catastrophe (18 percent of buyers versus 16 percent of brokers) and environmental liability (13 percent versus 35 percent).

One high-profile specialty line is terrorism coverage, which was flat for all buyers. Nearly two-thirds of both buyers and sellers reported no change in their latest renewal rate, while three quarters of risk managers and 69 percent of producers expect prices to remain the same in their next renewal. Again, however, far more producers (23 percent) than risk managers (8 percent) surveyed expect prices to rise.

Although far fewer risk managers (14 percent) reported buying terrorism coverage for the first time or substantially raising limits than last spring (28 percent), this is no doubt because the market is relatively saturated, Zurich explained.

“In the property world, we have take-up rates on terrorism coverage of well over 60 percent,” noted Mr. Maguire. “It's hit a plateau of the mid-60s, up from the low-to-mid-40 percent range when the coverage first was introduced. Everyone who is going to buy it has bought it, and in my experience, few who have bought the coverage are jettisoning it.”

This could all change, however, if the Terrorism Risk Insurance Act is allowed to expire at year's end.

Another high-profile line is employment practices liability. Although rates are flat for big buyers, smaller insureds face double-digit hikes, and the line in general is bracing for increasing exposure.

Indeed, frequency and loss costs have been “steadily increasing for employers of all sizes in all industries, and there are no signs that exposure to EPL matters is shrinking,” said Salvatore Pollaro, senior vice president of EPLI for Zurich's employment practices group. “For small to midsize customers, we are seeing them take higher retentions to help mitigate the frequency issue,” he added.

In directors and officers liability, “the market has become more competitive for both small and midsized accounts, as well as publicly-held corporate customers,” said Keith Thomas, senior vice president for Zurich's D&O business group.

He added, however, that in this volatile legal climate, pricing is far from automatic. “Buyers–particularly publicly-held corporations–will see reductions in rates only if their risk warrants it,” he said.

Longer term, “the [D&O] picture remains less certain on pricing,” he noted. “The liability environment is not improving, and one could argue it is worse given the political, regulatory and shareholder activist climate.”

Overall, however, the survey showed that while commercial insurance premiums are far more stable than even six months ago, carriers are not giving coverage away. Prices are not plummeting, and risk managers with questionable loss histories can still expect to see a rate hike.

Indeed, without a booming stock market to tempt a return to cash-flow underwriting, and with the industry boasting its first overall underwriting profit in decades, it's likely we have entered a unique age dominated by a “rational” market–not hard, not soft, but one in which carriers are underwriting according to risk, granting price cuts where they are earned, and charging more for riskier business.

“I would like to say this market is now rational. Rates are still either flat or going up, with some exceptions in property and catastrophe coverage, and rate reductions are still minimal,” said Mr. Ormerod.

“Rates for large property accounts increased dramatically post-9/11,” he noted. “While we have seen rate reductions in this area, we expect that they will stabilize. If they don't, return on capital will not be sufficient for insurers and that capital will move to areas where adequate returns can be achieved.”

“I'm the eternal optimist,” he added. “Maybe the industry is finally coming to its senses and realizing it can't keep giving capital away, and that stock and bond returns are not there to subsidize price cutting. Maybe we're getting to where we should be–rating discipline rather than a reactionary approach with the lemmings running off the cliff together.”

“The industry in general is satisfied with loss development and what we're getting in the way of premiums, and we're seeing a reasonable rate of return,” said Bob Mathe, line of business director for commercial auto with the Technical Center at Zurich. “The industry in general is acting as if the capital recovery process is complete and is now taking a rational approach to underwriting and rating.”

However, Mr. Murphy believes “it's too early to declare this to be a rational market. This is certainly a more stable period. We're more disciplined in our underwriting. But I would like to see us get through 2005 without prices falling off the table before I say for sure we're in a rational period. All it takes is one or two people and the irrational cycle might start all over again.”

“Maybe we're getting to where we should be–rating discipline rather than a reactionary approach with the lemmings running off the cliff together.”

John Ormerod, Marketing Director

Zurich, North America

“Everyone who is going to buy [terrorism insurance] has bought it, and in my experience, few who have bought the coverage are jettisoning it.”

Greg Maguire, Property Group Director

Zurich, North America