From the December-January 2011 issue of Treasury & Risk magazine

Insurance Market Still Soft

Commercial premiums have been declining for six years, and given that the U.S. economy is still sluggish and the insurance industry still has abundant capital, rates are expected to remain under pressure this year.

"Buyers are going to continue to benefit from a very competitive marketplace," says David Bradford, executive vice president and editor-in-chief at Advisen, which provides data and analytics for the insurance industry.

The economy's downturn ate away at the demand for commercial coverage, as companies went out of business or scaled back. At the same time, the stock market's rebound and the absence of big catastrophe losses over the last couple of years bolstered insurers' capital, leaving the industry with ample capacity.

Current low interest rates have bolstered the value of older, higher-yielding bonds in insurers' portfolios, providing another boost to capital, Bradford says. But he notes that the bonds insurance companies are buying these days carry lower yields, which will cut their income in the future.

One possible threat to subdued insurance premiums: a major catastrophe that causes losses that wipe out a significant amount of insurers' capacity, prompting higher premiums.

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