NU Online News Service, April 3, 3:44 p.m. EDT
With falling top-line revenue due to a deepening recession and a depleting policyholders' surplus capital base, the upcoming price increase cycle is projected to be different from previous periods, according to a survey by a data technology firm.
New York-based Advisen said in a report that although insurance is mostly a noncyclical industry with steady demand during most recessions, this is not an "average recession"--and is actually closer to the Great Depression.
"While past recessions have influenced insurance pricing, no recession since World War II has influenced both supply and demand so profoundly," David Bradford, Advisen's executive vice president and chief knowledge officer, said in a statement.
"Hard market conditions eventually will provide insurers and brokers some relief, but we see absolute top-line income declining through 2009," he added.
Advisen's briefing, "The Impact of the Economic Crisis on the P&C Insurance Industry," examined economic factors influencing insurer profitability and the commercial insurance pricing cycle.
The firm said that capital-draining developments like recession-driven fraud losses, in conjunction with stagnant capital markets, inevitably will lead to a "hard" market and rate increases.
The hard phase of this market cycle, however, will be materially different from prior cycles, Advisen said. The economic crisis will cause exposure units to shrink, businesses to fail, and will force companies to consider budget-cutting measures such as higher retentions and lower limits.
The falloff in demand, it said, will result in a top-line premium decline across the industry, substantially offsetting gains from higher rates.
Advisen said the current unemployment rate indicates the current recession could end up being considered the worst in the post-Depression era.
The depths of the 1981-1982 recession saw the unemployment rate reach 10.8 percent, comparable to an 8.3 percent rate today.
Commercial insurance follows a boom-and-bust pricing cycle that, conventional wisdom proclaims, is largely uncorrelated with broader economic cycles. Advisen, however, found that the current recession is different. The severity of the economic crisis will adversely impact both the top lines and bottom lines of commercial insurers, making for a turbulent 2009.
"Four years of falling rates is putting stress on both insurers and brokers," noted John Molka III, CFA, Advisen's senior industry analyst and the author of the briefing. "Under more stable economic conditions, the market would be poised for a rebound. But economic turbulence is adding a new layer of complexity to the pricing cycle. We've identified the various forces at work on insurers' top and bottom lines, and how those forces are likely to influence pricing and capacity in 2009 and 2010."
The report can be purchased online for $299 at http://corner.advisen.com/reports_topical_impact_economic_crisis_pc.html.
Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader
Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
- Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
