Overcapacity in P/C Insurance Keeping Commercial Prices Down

Most commercial lines insurance prices continued their downward trend in the first quarter, as underwriters’ efforts to hold the line on premiums buckled under the pressure of a highly overcapitalized market.

Three of the four lines of business tracked by the RIMS Benchmark Survey posted material decreases in average renewal premium, as reported by risk managers.

“Risk managers tell us that insurers are more willing to walk away from underpriced business, and the numbers from the past couple of quarters seemed to show resolve to not let premiums fall further,” said Dave Bradford, executive vice president of Advisen, which administers the survey. “But capacity, as measured by policyholders’ surplus, is at an all-time high in the U.S. property/casualty market. That puts a lot of pressure on premiums, and we saw them slip a bit in the quarter.”

Property insurance posted the largest decrease, falling 4.2 percent on average for policies renewing during the quarter.

The average workers’ compensation premium fell 3.2 percent and the average directors and officers liability premium dropped 2.3 percent.

General liability was the only line tracked by the survey to not record a material decrease, declining only 0.8 percent.

Catastrophes around the world in the first quarter of 2011, including the Queensland floods in Australia, the Christchurch earthquake in New Zealand and the Tohoku earthquake and tsunami in Japan, produced billions of dollars of losses to global insurers and reinsurers, but thus far have not had an impact on premiums in the U.S., according to Advisen.

Additional catastrophes, however, could exceed the tipping point, sparking higher premiums for property and, possibly, other lines of insurance.

“The earthquakes in New Zealand and Japan are reminders as to how vulnerable the U.S. is to devastating catastrophes,” said Frederick Savage, a member of the RIMS board of directors. “A big earthquake or hurricane could cause premiums across the board to change dramatically. It is still relatively early on in the year with the Gulf of Mexico hurricane season still to come but barring a large catastrophe, 2011 looks to be another year of competitive pricing. There certainly is no shortage of capacity in most lines.”