Commercial Insurance Posts Full Year in Soft Market, Reports RIMS Benchmark Survey

February 7, 2005

The commercial insurance industry experienced a full year of a soft market conditions in 2004, as the last months of the year represented the fourth consecutive quarter of declining prices, according to the RIMS Benchmark Survey, a comprehensive survey of current policy renewal prices as reported by corporate risk managers.

The year of declining prices was the longest sustained soft market since the 1990s, but overall economic issues should ensure that insurance capacity remains at levels that discourage a pricing freefall, reported RIMS and Advisen, both sponsors of the survey.

“The year ended pretty much as it had started with moderate, continuing declines in premium prices.” said Daniel H. Kugler, RIMS vice president, membership. “Risk managers should be pleased with the pricing trends, but underwriters also should be happy that premium reductions have been fairly moderate compared to the cutthroat competition of last soft market, and that the industry seems to have returned to financial health.”

“This is a long slow march through a soft market, driven by growing P/C industry surplus, which translates into increased capacity,” said David Bradford, editor-in-chief at Advisen. “But, viewed in relationship to GDP, industry surplus is essentially at 2000 levels, well below its peak in 1998, and the insurance industry’s returns still significantly lag the S&P 500, all conditions that should prevent prices from slipping into a freefall.

“The amount of data we collected this quarter offered a truly comprehensive view of industry conditions, making the market more and more transparent for risk managers seeking greater clarity on pricing and other decision-drivers,” he continued.

The fourth quarter renewal information summarized by Advisen Ltd. for the Risk and Insurance Management Society (RIMS) represents the most data ever collected in the history of the survey, Advisen said.

Declines in the period were essentially across all major lines – except EPLI and workers’ compensation – representing the first quarter of this soft market in which declining premiums were almost universal. The survey also found that in the fourth quarter, property premiums suffered worst, dropping just about 7 percent, despite one of the worst years for natural disasters in the United States, including four devastating hurricanes in Florida.

Directors and officers liability, umbrella/excess liability, fiduciary liability and general liability premiums all declined in the quarter, albeit at moderate rates with most declining about 2 percent, the report indicated. Workers’ comp premiums, driven by diverse conditions on a state-by-state basis, showed mixed results for the quarter, but on average experienced a slight up-tick in premium levels (1.5 percent) across the country.

Looking back at 2004 on the whole, property and general liability led the market down, both showing average premium decreases by the fourth quarter of 2003 and sliding steadily lower throughout 2004. D&O teetered at the summit of its steep 2001-2003 assent into 2004, though the percentage of policies renewed with rate decreases steadily grew.

“By the third quarter, D&O premium decreases overwhelmed increases and the line joined property and general liability on the slippery slope down,” Advisen’s Bradford said.

The 2004 RIMS Benchmark Survey is scheduled to be published in March 2005.

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