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Commercial insurance prices rising— but will it last?

Commercial insurance prices rising— but will it last?

Signs are increasing that the commercial property/casualty insurance market is definitely turning, but it's by no means a hard market yet, according to industry observers.

Prices have been rising for several commercial insurance lines in recent months, and insurers and reinsurers alike have reported that they received higher prices during last year's fourth quarter.

Composite market reports issued by Dallas-based electronic insurance exchange MarketScout, the Washington-based Council of Insurance Agents & Brokers and brokerages all indicate a pricing change in the market.

For example, MarketScout reported that commercial insurance rates increased an average of 1% in November and December 2011 compared with a year earlier. The council reported that commercial insurance rates rose 2.8% during the fourth quarter. In addition, among other broker reports, New York-based Marsh Inc. projected rates would continue increasing this year.

But questions remain, such as how much insurance pricing will harden and whether the price increases can be sustained.

“We called it back in November basically flat and starting to turn, and every indication we see is that is continuing,” said Richard Kerr, CEO of MarketScout.

“It is not going to be a really fast, sharp turn,” Mr. Kerr said.

“We saw in the fourth quarter certainly an indication that the market is inching up into positive territory,” said Coletta Kemper, vp-industry affairs for the council. “Certainly a lot of people talk about the catastrophe-driven part of the market, but the trend seems to be going up across the small, medium and large accounts.

“We can't predict the future, but from what we saw in the fourth quarter, it's definitely going up,” Ms. Kemper said.

“There's definitely something going on with pricing,” said J. Paul Newsome, managing partner at Sandler O'Neill Partners L.P. in Chicago. “We've seen consistent price increases from many public insurers in the fourth quarter.”

But Mr. Newsome said the “bigger question is how great those price increases can be and how long they will last. We just don't know yet. Exactly why we're seeing price increases is not clear yet, and that makes it hard to determine whether or not we're going to have sustained price increases.”

Continued low interest rates will “definitely put more pressure” on insurers to improve their combined ratios, he said.

Alfred Tobin, managing principal of Aon Risk Solutions' property practice in New York, said the market for noncatastrophe-exposed property is experiencing price stabilization and, in some cases, flexibility. “It's a healthy marketplace; carriers are making money. I don't see anything dramatic happening,” he said. “The No. 1 factor is supply and we don't have a supply problem.”

A report issued recently by Willis Group Holdings P.L.C noted the impact of last year's catastrophes and low interest rates on insurers.

“Hopefully, 2012 will be a much quieter year on the loss side and, if so, we can see the insurers return an underwriting profit on the property side,” Dave Finnis, national property practice leader, said in the Willis report. “That would help put a halt to the continuing rise in rates.”


Mr. Kerr said in many segments of commercial insurance, it's helpful to view the United States as many “micromarkets.” The situation varies in different states. For example, prices for earthquake-exposed property in California are not being as severely affected as hurricane-exposed property in Florida, he said.

But overall economic problems also are affecting insurers, who are pulling back from underwriting some risks. For example, rates for workers compensation insurance in almost every state are going up, Mr. Kerr said. Major insurers are reducing their capacity for the lines, thus driving rates up.

Two factors are affecting the marketplace, said John Wicher, principal at John Wicher & Associates Inc. in San Francisco. Poor underwriting results and a pickup in economic activity that has been going on at least 12 months are driving up prices, he said.

“The (insurance) industry is a lagging indicator and it takes time for that to be reflected in premiums,” Mr. Wicher said. “Now, it's revealing itself.”

Mr. Wicher also said excess and surplus lines volume appears to be picking up, which he called a “real indicator” of a market turn. “Business that was finding its way into standard market is going into the surplus market, which is an indicator of scarcity,” he said.

“I definitely expect to see some cycle turning and hardening in commercial lines in the next 12 to 18 months,” said John L. Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio. He said underwriting profitability is deteriorating, and some signs indicate that cash flow and investment income are declining.

“I think what we're seeing is a "market correction,'” Robert P. Hartwig, president of the New York-based Insurance Information Institute, said in an email. “In other words, soft market conditions persisted for so long that markets "overshot' the fundamental price of insurance—perhaps "undershot' is more appropriate in this case.”

“Insurers have now recognized the general inadequacy of the rates they charge and are working to bring the price of insurance to a level that is consistent with fundamentals—i.e., claim frequency and severity trends,” Mr. Hartwig wrote.

“Such a correction does not require a "hard market' in the traditional sense of the term, but rather a recognition that pricing undershot its fundamental price and sufficient willingness and discipline to return prices to a level that is sustainable from a cost of capital perspective,” he said.

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