RIMS: Q3 Shows Softening Despite Challenges

Two major hurricanes and a global credit crunch were not enough to derail the relentless soft commercial insurance market in the third quarter, according to RIMS Benchmark Survey. However, lower insurance industry net income may signal a coming turn in the insurance pricing cycle.

Property, with an 8.5 percent decrease in average premium, and general liability—which fell 9.6 percent—led the market down 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.

Skyrocketing claims triggered by the meltdown of the subprime mortgage market slowed the rate of descent of the average directors’ & officers’ liability (D&O) premium, which fell by only 2.1 percent during the quarter. Excluding financial and real estate companies from the sample, the average decrease was 7.4 percent. The average workers’ compensation premium was nearly flat for the quarter, falling only 0.6 percent.

The crash of stock markets around the world 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 policyholders’ surplus—the capital held by insurers to support underwriting activities. A period of falling policyholders’ surplus should hasten a turn in the pricing cycle. Commercial insurance pricing has been trending downward since the beginning of 2004.

“It was a rocky third quarter for insurers, but risk managers still saw prices improve on average,” says John Phelps, member of RIMS board of directors and director of business risk solutions at Blue Cross and Blue Shield of Florida Inc. “It is increasingly clear, though, that premiums cannot continue to fall at this pace, especially with the global economy in chaos.”

“Nearly five years of deteriorating rate levels are taking a toll on underwriting profits,” adds Dave Bradford, executive vice president at Advisen. “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.”