The market for commercial insurance was soft in 2016 forthe third year in a row, and the buyer's market should continueinto this year, according to the recently released RIMS BenchmarkSurvey.

The RIMS survey, which was compiled in conjunction withconsultancy Advisen, cited declines across all lines of coverageexcept for total fidelity, surety, and crime costs. It showed thatthe total cost of risk per $1,000 of company revenue dropped 5%last year to $10.07, from $10.55 in 2015. That follows declines inthe total cost of risk of 2% in 2015 and 1% in 2014.

The survey, based on responses from 759 organizations, showsproperty insurance costs declined 8% as a portion of the total costof risk, while liability costs were down 5% and workerscompensation costs slid 6%.

The report noted that expected increases in rates for certainlines of coverage, such as cyber, errors and omissions, and workerscompensation coverage, failed to materialize in 2016.

Looking ahead to this year, the RIMS report cites predictionsthat property and most liability lines will be flat to 10%lower.

Steven Weisbart, senior vice president and chief economist atthe Insurance Information Institute, said that on the demand side,the economy's moderate rate of growth, the modest pace at whichcompanies are investing in new plants and equipment, and the factthat the U.S. is near full employment, suggesting hiring willexpand more slowly going forward, all point to “a pretty modestexpansion of the demand for insurance.”

On the supply side of the equation, capital has been pouringinto the insurance market, in part because of a scarcity of otherappealing options. But that interest in putting money to work ininsurance could change if economic growth gains steam, Weisbartsaid. “If the global economy starts moving along at a faster clip,it's entirely possible that capital will be withdrawn from theU.S., especially the insurance sector, and be redeployed elsewhere,raising rates and lessening the willingness to supply insurance atlower rates.”

Having said that, “if nothing changes, then yes, it looks as ifthe market will remain fairly soft,” he said.

Weisbart cited an increase in interest rates as as one factorthat could have an effect on insurance pricing. Higher rates mightcreate other investment opportunities, siphoning off some of thecapital now deployed in the insurance industry, he said. Higherrates could also give insurers a boost by increasing the investmentincome they receive from their portfolios.

A recent report from insurance brokerage Lockton Companiessuggests that commercial insurance prices remained soft during thefirst quarter of this year.

“By and large the market has stayed very competitive, and wedon't see any major forces that are going to change that in thenext six to 12 months,” said Mark Moitoso, senior vice presidentand analytics practice leader at Lockton. “There's been a lot ofnew entrants into the marketplace, companies that have expandedappetite.”

And despite the soft market conditions, “the combined ratios andthe results for the industry have performed very well,” hesaid.

A huge natural disaster that inflicted major losses on carrierscould shift the market, but Moitoso pointed out that HurricaneMatthew last fall failed to affect pricing. Moreover, the U.S.experienced a great number of weather problems during the firstquarter of this year, including storms and snow and ice events, but“we're doing renewals every day and we don't see that changing thebehavior or course at this point in time,” he said.

Moitoso pointed to commercial auto as one line of coverage thatremains challenging. Lockton's report notes that frequency andseverity rates for commercial auto coverage have been increasingrapidly.

He argued that going forward, insurance pricing is likely to beless volatile than it has been in the past, because of markets'increased transparency and because insurance companies useanalytics and modeling in their underwriting.

“The industry has been so accustomed to these major peaks andmajor valleys over underwriting cycles,” Moitoso said. “The highsare never going to get as high and the lows are never going to getas low.”

Risk Managers' Perspective

Declining prices sound like a buyer's dream come true, but riskmanagers say they still have their work cut out for them.

“As a buyer, it shouldn't changeyour thought process,” said Carolyn Snow, director of riskmanagement at Humana Inc. and a past president of RIMS. “You shouldstill present yourself and plan in the same way as if it were ahard market.

“You should always go into it with the approach that you'reselling your account,” explained Snow, pictured at left. “You needto position your account as best in class, if you will. You want toposition yourself as being the best because you're competing forsurplus, the best quotes or the best coverage.”

She acknowledged, though, that lower rates can make negotiatingeasier. “When there is a lot of capacity in the market, then youknow as a buyer that you have more choices,” Snow said “You can bemore selective, and maybe you can engineer a better coverage—'I'mOK with the premiums, but I'd like some improvement, I'd like thesublimits better.'”

The savings realized in renewal negotiations during a softmarket might allow the risk manager to expand the company'scoverage or else provide the company with the savings.

“You can look at it and say this is the opportunity we have tobuy higher limits on certain coverages, or to expand and buy a newcoverage, such as cyber insurance, if you haven't bought thatbefore,” said Gloria Brosius, director of risk management andinsurance at Pinnacle Agriculture Holdings and a member of the RIMSboard of directors.

“You have to consider where the company sits financially, ifthey're only looking for cost savings or if they're looking forexpansion as well,” Brosius added. “A good risk manager is offeringboth options—we can save, or we can expand our coverages or buythis new policy. It definitely gives us options.”

“You really can't take your eye off the ball in a soft market,”Snow said, “but it does give you the opportunity to enhance youroverall program, maybe enhance your coverage in some areas.”