From the December/January 2012 issue of Treasury & Risk magazine

Soft Market Ends

Insurance costs are finally heading higher, but experts say the increases will be moderate.

Companies have enjoyed a soft insurance market for years, but that’s coming to an end. Premiums started to rise recently, and that trend is expected to continue this year. U.S. insurers remain well-capitalized, though, so the cost increases should be moderate. The change is driven partly by the losses insurers suffered last year, particularly those related to the many weather catastrophes, as well as diminished returns on insurers’ investments. While last year’s insured losses totaled $70 billion to $80 billion, many of the most costly events, like Japan’s earthquake and tsunami and the floods in Thailand, were felt more by overseas insurers than those in the U.S. Still, the industry-wide combined loss ratio has risen to 109, which means insurers are losing nine cents for every dollar of premium they write, says Dave Bradford, president of Advisen’s research & editorial division.

And the low interest-rate environment means insurers aren’t getting a lift from their investment returns. “It’s just encouraging underwriters to push for higher rates.” Bradford says, but “it’s still an enormously overcapitalized market, so there’s still a question of whether the rate increases will stick.”

Steven Weisbart, chief economist at the Insurance Information Institute, also points to capacity as a mitigating factor. “We’re a couple of years away from a traditionally hard market,” he says.

Dean Klisura, the U.S. risk practices leader at insurance brokerage Marsh, recalls that in the last hard market, prices shot higher. “Clients were getting 100% rate increases overnight,” Klisura says. “This marketplace is very different fundamentally.”

The difference reflects an influx of capital, he says. “There’s more capacity than we’ve ever seen. Private equity, hedge funds and other providers can move in and out of the markets more fluidly, so gaps get filled in.”

Still, almost half of Marsh clients that renewed property coverage in the fourth quarter saw price increases, and Klisura predicts that percentage will rise, while noting that pricing reflects companies’ individual circumstances. “Clients with loss experience, clients with catastrophe exposures, are starting to see double-digit rate increases in many situations,” he says. “Clients who aren’t exposed to catastrophes, who don’t have losses, are still having very competitive renewals.”

Workers compensation and lead umbrella are also seeing increases, but surveys suggest directors and officers liability coverage is still declining in price.

Of course, there’s always the possibility that another major disaster or two changes the outlook for insurance prices. And the European debt crisis has the potential to affect insurers’ investment returns and pricing, as well as the global economic outlook.



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