Despite two major hurricanes and a global credit crisis, the relentless soft commercial insurance market continued in the third quarter–although falling insurance industry net income may signal a coming turn in the pricing cycle, the “Risk and Insurance Management Society Benchmark Survey” found.
“Frankly, the industry was pretty–and still remains somewhat–overcapitalized, so it's going to take a couple of quarters of losses before we ring out that excess capitalization,” Dave Bradford, chief knowledge officer at Advisen, told National Underwriter. Advisen performs and analyzes the survey of North American corporate risk managers for RIMS.
Although he said he was not surprised by the findings, he added he was “maybe a little bit surprised just how much property and general liability [rates] had come down–but we were expecting to see some fairly significant softening in this quarter.”
Asked whether a stiffening of rates would take time to trickle down from reinsurers, he said that “actually, I think the insurers are doing a pretty good job themselves of destroying their capital at this point in time.”
The likely scenario, he said, is that in 2009, “around the second quarter, prices will have bottomed out. If the losses continue to mount, we should see some hardening by the end of [next] year.”
He added that although the hardening will most likely happen across all lines of business, “I suspect that [directors and officers liability prices] will lead the charge back up again, just because it's getting battered so much right now.”
“It was a rocky third quarter for insurers,” John R. Phelps, a member of the RIMS board of directors as well as director of business risk solutions at Blue Cross and Blue Shield of Florida Inc., said in a statement. “But risk managers still saw prices improve on average. It is increasingly clear, though, that premiums cannot continue to fall at this pace, especially with the global economy in chaos.”
The survey found that property coverage (with a decrease of 8.5 percent on average) and general liability (down 9.6 percent) were the lines with the steepest price declines in the third quarter. The average property premium fell sharply despite as much as $20 billion in insured losses from Hurricanes Gustav and Ike.
The 9.6 percent decrease in average general liability premium is the largest single quarterly drop since 2005, according to Advisen.
Triggered by the meltdown of the subprime mortgage market, skyrocketing claims slowed the rate of descent of the average D&O premium, which fell by only 2.1 percent during the quarter. However, excluding financial and real estate companies from the sample, the average drop was 7.4 percent.
The average workers' compensation premium was nearly flat for the quarter, falling only 0.6 percent.
Looking ahead, the crash of stock markets worldwide and a deepening global credit crisis led to investment losses for many insurers in the third quarter. These losses–combined with deteriorating underwriting results, driven by falling premiums and mounting claims from the subprime mortgage meltdown and the credit crisis–reduce policyholder surplus, which represents the capital held by insurers to support underwriting activities.
A period of falling policyholder surplus should hasten a turn in the pricing cycle, according to Advisen, which noted that commercial insurance pricing has been falling since the beginning of 2004.
“Nearly five years of deteriorating rate levels are taking a toll on underwriting profits,” Mr. Bradford said in a statement. “A.M. Best forecasts a 2008 combined ratio of 104.0 for the commercial property and casualty industry. Together with lower investment returns as a result of the global credit crunch, conditions may be ripe for a reversal in the market cycle in 2009.”
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