After more than three years of rate increases in P&C premiums, a soft market cycle is expected to begin early this year, according to MarketScout, an insurance distribution and underwriting company headquartered in Dallas. MarketScout compiles the Commercial and Personal Lines Market Barometers.
"We are on the cusp of a soft market," said MarketScout CEO Richard Kerr. “Throughout 2014, the composite P&C rate slowly drifted towards renewing as expiring and in December we finally hit that mark. Historically, the move to softer rates is in line with prior market cycles.”
According to Kerr, MarketScout started tracking commercial P&C insurance rates in July 2001, in the midst of a hard market cycle that ended in February 2005. In March 2005, the market turned soft, registering the first composite premium reduction at minus 1 percent. That soft market cycle lasted until August 2011, 78 months six and half years.
“In November 2011, we entered another market cycle of increasing premium rates. The rate increases were not as dramatic in prior cycles; they were steady and sensible. After 37 months, the rate increases appear to be over. The next soft market will start as soon as a composite rate decrease is measured. We expect the beginning of the next soft market cycle to be in early 2015.”
Kerr added in the statement that MarketScout does not expect the coming cycle to be quite as long or consist of similar aggressive pricing that occurred in the last soft market cycle of 2006 to 2011. Nonetheless, he said, companies need to be prepared for a changing environment. “If you budgeted for increases in rates in 2015, you best change that portion of your business plan now. We suggest planning for slight rate decreases beginning at the end of the first quarter and slowly increasing to a reduction of 4 to 5 percent by the end of 2015,” he said.
According to MarketScout, increased exposures related to economic growth in 2015 should offset the rate decreases. Insurers will be covering greater exposures, so the benefit for them may be offset by more claims. Intermediaries will enjoy increased revenues as their insureds grow, and this additional revenue will help balance out the revenue reduction as a result of lower rates.
By coverage classification, rates for all coverages were down 1 percent with the exception of Employment Practices Liability Insurance (EPLI), which remained at plus 2 percent and commercial property and auto, which were down 2 percent. As measured by account size, medium and large accounts adjusted down 1 percent and 0 percent or flat respectively. By industry class, all were down 1 percent from last month with the exception of transportation, which was down 2 percent.
The National Alliance for Insurance Education and Research conducted pricing surveys used in MarketScout's analysis of market conditions. These surveys help to further corroborate MarketScout's actual findings, mathematically driven by new and renewal placements across the United States.
