Commercial Insurance Prices Stay Level for 5th Straight Quarter

A fragile global economy, excess capacity in virtually every line of commercial insurance and last year’s below-average catastrophic losses combined to keep commercial insurance prices flat during the first quarter of 2010. This marks the fifth consecutive quarter of little or no price increases after nearly five years of steady decreases.

That’s according to professional services company Towers Watson’s most recent Commercial Lines Insurance Pricing Survey (CLIPS).

The survey compared prices charged on policies underwritten by 37 participating insurance companies — representing about 20 percent 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.

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 percent 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 percent 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.

CLIPS data are based on both new and renewal business figures, when available, obtained directly from carriers underwriting the business. This particular survey compared prices charged on policies underwritten during the first quarter of 2010 to the prices charged for the same coverage during the same quarter in 2009.

CLIPS participants represent a cross section of U.S. property/casualty insurers that include many of both the top 10 commercial lines companies and the top 25 insurance groups in the U.S.