Soft market despite hurricanes and financial crisis

Two major hurricanes and a global credit crunch were not enough to derail the relentless soft commercial insurance market in the third quarter, according to a RIMS Benchmark Survey.

However, according to the survey of North American risk managers, lower insurance industry net income may signal a coming turn in the insurance pricing cycle.

Property premiums, which fell an average of 8.5%, and general liability, which dropped 9.6%, led the market down in the third quarter. This was despite as much as $20bn in insured losses from hurricanes Gustav and Ike.

The 9.6 % decrease in average general liability premium is the largest single quarterly drop since 2005.

Claims triggered by the meltdown of the subprime mortgage market slowed the rate of descent of the average directors’ & officers’ liability (D&O) premium, which only slipped 2.1 % during the quarter. But excluding financial and real estate companies from the sample, the average decrease was 7.4 %.

The average workers’ compensation premium was nearly flat for the quarter, falling only 0.6 %.

“It is increasingly clear, though, that premiums cannot continue to fall at this pace, especially with the global economy in chaos.

John Phelps, member of RIMS board

The crash of stock markets around the world and a deepening global credit crisis led to investment losses for many insurers in the third quarter.

These losses, combined with deteriorating underwriting results driven by falling premiums and mounting claims from the subprime mortgage meltdown and the credit crisis, reduce policyholders’ surplus—the capital held by insurers to support underwriting activities.

A period of falling policyholders’ surplus should hasten a turn in the pricing cycle, said RIMS. Commercial insurance pricing has been trending downward since the beginning of 2004.

‘It was a rocky third quarter for insurers, but risk managers still saw prices improve on average,’ said John Phelps, member of RIMS board of directors and director of business risk solutions at Blue Cross and Blue Shield of Florida.

‘It is increasingly clear, though, that premiums cannot continue to fall at this pace, especially with the global economy in chaos.’