A mixture of a fragile global economy, excess capacity in virtually every line of commercial insurance and last year’s below-average catastrophic losses kept commercial insurance prices flat during the first quarter of 2010, according to Towers Watson, New York.
The global professional services company's most recent Commercial Lines Insurance Pricing Survey (CLIPS) results marks the fifth consecutive quarter of little or no price increases after nearly five years of steady decreases.
The survey, which tracks the differing trends in pricing across various regions, lines of business and account sizes on a quarterly basis, compared prices charged on policies underwritten by 37 participating insurance companies—representing approximately 20% of the commercial insurance market (excluding state workers compensation funds)—during the first quarter of 2010 to the prices charged for the same coverage during the first quarter in 2009.
CLIPS participants represent a cross section of U.S. property/casualty insurers, include many of both the top 10 commercial lines companies and the top 25 insurance groups in the U.S. CLIPS’ measurement of both pricing changes and loss ratio changes.
This information is consistent with the pricing observed during all of 2009. Data for most lines indicate flat or small increases in prices, offset by price reductions in commercial property, directors and officers liability (D&O), and employment practices liability (EPL).
“It’s apparent that the market conditions are holding down price increases, while insurers—as they have for more than a year—continue to exhibit pricing discipline, given their concerns regarding the direction the economy may take,” said Bruce Fell, leader of Towers Watson’s risk consulting and reinsurance brokerage services to the P&C industry in the Americas. “Looking at D&O, the price increases we had seen in the past year in response to the financial crisis have disappeared, and pricing seems to be reverting back to pre-crisis price levels.”
CLIPS findings indicate that accident-year-to-date 2010 loss ratios deteriorated 5% relative to year-to-date 2009. This deterioration (based on only three months of information and, therefore, preliminary) compares to an estimated deterioration of 4% for accident-year 2009 over 2008. Early estimates of claim costs through the first quarter point to somewhat higher inflation than in 2009, which contributes to the larger loss ratio deterioration. Aggregate price change indications showed little differentiation by account size, as all were nearly flat.
Fell said he believes that, with current market dynamics, it is becoming harder than ever for property/casualty insurers to profitably write business without sophisticated risk selection and pricing. He says the strategic use of predictive modeling and other sophisticated pricing techniques—while not a cure for the industry’s current pricing woes—can better help insurers adequately price their business.
“As companies become more adept at identifying and capturing key factors and their relative influence on results, they can become more successful at selecting and pricing against their competition,” said Fell.
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