Study Shows Commercial Property, GL Rates Falling

April 21, 2004

The costs for two major commercial lines insurance fell in the first quarter of 2004, according to a RIMS Benchmark Survey.

In the first quarter of 2004, premium prices for property insurance fell by about 1.5 percent. General liability insurance premium prices also fell by 1.4 percent, marking the first time in over four years that prices for two major lines of insurance retreated in the same quarter. The cost of property insurance fell 8.8 percent in the fourth quarter of 2003 in the first decline in premium prices for any major line of commercial insurance since 2000

The price increases in other lines of insurance also continued to slow, as employment practices liability, crime and, most notably, directors and officers liability all experienced price increases of less than five percent. The first quarter renewal information was summarized by Advisen Ltd. for the Risk and Insurance Management Society (RIMS).

“The data we have seen over the last three quarters suggested that rate increases were slowing and now the latest numbers are clearly demonstrating the shift in the market from last year.,” said Christopher Mandel, RIMS Vice President, Chief Risk Officer and Secretary. “At last year’s RIMS conference, we showed that that D&O Liability prices were skyrocketing at a rate close to 175 percent, but this year, the majority of the lines are experiencing increases of less than five percent; that’s a very dramatic market move.”

Advisen, a provider of specialized information, analytic and benchmarking tools for commercial insurance professionals, analyzes the survey results continuously, offering a dynamic and virtually real-time window into the current purchase patterns of commercial insurance buyers. The results represent data compiled from over 1100 organizations to date.

The first quarter renewal prices validate the market data trends over the last two quarters, which indicated that rate increases were declining, but there is some question about the length and depth of this new market. The overall commercial insurance market had been experiencing continual price increases since 2000, which was precipitated by a massive decrease in insurance surplus from 2000 to 2001. Now, as supply catches up to demand and without a catastrophic event or high profile scandal, the market has balanced out and most prices have flattened or decreased.

“The question right now is not whether the market is softening, but instead how long will it stay this way. We wonder if insurers will be able to take a protracted hit on prices in the current economic climate,” said David Bradford, chief knowledge officer at Advisen. “The renewal numbers are clear, but other indicators, like interest rate levels and stock market valuations, affect the cash position of insurers and, therefore, the prices those insurers charge their customers.

“Unless those market drivers start contributing more to cash reserves, insurers will have to rely on pricing to sustain necessary cash positions,” he continued. “We’d like to think that insurance prices are determined solely by market events, but the economic reality is other forces contribute significantly to the market dynamics, including how long this soft market will last.”

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