Market in Transition Phase - Prices Up For Some, Not All

Brian Ruane, Real Estate Director

Much has been written and said, recently, about the direction of rates. It is clear to us that insurance carriers are closely reviewing their book of business and intend to obtain premium levels commensurate with exposure. This means rate increases for some, not for all, particularly those accounts with adverse loss experience and or risks with exposure in areas subject to natural catastrophes. What is driving this market in transition ? 2011 had an unprecedented number of natural catastrophes, globally . The total insured amount was the highest on record exceeding $ 100 Billion in losses. Investment income was relatively low for insurers in this low interest rate environment. The yield for the industry was 3.9 percent. The combined ratio in 2011 grew to 108.2 percent up from 102. 7 percent in 2010 and net income dropped 40.3 percent year over year. After many quarters of consistent reserve releases, into their bottom lines, many insurers , according to some industry analysts, will cease this practice . We are seeing some carriers add to reserves , particularly for Workers Compensation. Workers Compensation, the largest single line for insurers, has a projected combined ratio of 115 percent for 2011. According to a report by S&P, “signs point to unprofitable years ahead for Workers Compensation” and they are “uncertain if the pace of rate increases will be sustainable and if they will cover increasing claim costs”, particularly related to rising medical and pharmaceutical benefits. Workers Compensation has, historically, been a difficult line for insurers . It has been profitable only three times in the past 20 years. As a result of these factors AM Best reported :” the long term reversal of soft prices has arrived “. Their report cited an increase of 3.9 percent in net premium for the industry in 2011 the first increase since 2004. Other firms who follow the industry are reporting similar findings. National Underwriter reports “2011 came to a close with firm evidence the soft market has ended “. Market Scout , which tracks rate direction, stated “the average rate rose 1 percent in December marking the 2nd consecutive month of rate increases. For purposes of comparison it is worth noting that in January 2011 rates were declining by 5 percent. Insurers are seeing the impact of the changing market in their results. Travelers reported ” the rates on the business we are writing is up significantly in the past six months “. Chubb stated “the company was able to secure an average rate increase of 6 percent for commercial lines “. The reinsurance market , which has a strong impact on the direction of rates , is , according to a report in Business Insurance: ” firming especially for catastrophe perils “. Many risk managers and financial executives, who are facing property renewals, have significant concerns about the availability and pricing of coverage. This concern was expressed in a report prepared by The Independent an international coalition of insurance brokers and risk management service firms. What should be done to manage these macro forces and obtain the optimal result in this market in transition phase of the highly cyclical insurance industry. We recommend that you begin the renewal process early. We also suggest you meet the Underwriter, if possible, to address any concerns they may have and to try, with the broker, to determine the direction of rates for the renewal as early as possible. You may also want to consider, if appropriate, accessing alternative markets . This includes markets in London, Europe and Bermuda. It is very important that you provide as much information as possible including primary and secondary building characteristics. The new RMS 11 catastrophe model is having, for some, an impact on the direction of rates. You should comply with all reasonable loss control recommendations and partner with the Broker and Underwriter in taking whatever steps necessary and prudent to control the cost of risk. Finally, you should review the status of all open claims and loss reserves to ensure they are accurately set. If you sustained a loss that may have an impact on the premium, explain , where appropriate, any measures taken to prevent a reoccurrence . While some will see rate increases on specific lines of coverage, some companies will not need to absorb these price increases. The industry has ample surplus and we have seen cases where Underwriters will compete aggressively for well managed accounts, with favorable loss experience and a focus on risk mitigation and loss prevention. The news is not bad for all companies.


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