Commercial insurance follows a boom-and-bust pricing cycle that generally thought to be largely uncorrelated with broader economic cycles. But according to a new report released by Advisen Ltd., the current recession is different. The severity of the economic crisis will adversely impact both the top lines and bottom lines of commercial insurers, making for a turbulent 2009, researchers for Advisen say.
“While past recessions have influenced insurance pricing, no recession since World War II has influenced both supply and demand so profoundly,” said David Bradford, Advisen’s executive vice president and chief knowledge officer. “Hard market conditions eventually will provide insurers and brokers some relief, but we see absolute top line income declining through 2009.”
“The Impact of the Economic Crisis on the P&C Insurance Industry,” the new Advisen briefing, examines the economic factors influencing insurer profitability and the commercial insurance pricing cycle. Inevitably, capital-draining developments like recession-driven fraud losses, in conjunction with stagnant capital markets, will lead to a “hard” market, Advisen says. However, the hard phase of this market cycle will be materially different from prior cycles.
“The economic crisis will cause exposure units to shrink, businesses to fail, and will force companies to consider budget-cutting measures such as higher retentions and lower limits. This falloff in demand will result in a top-line premium decline across the industry, substantially offsetting gains from higher rates,” Advisen stated in a release.
“Four years of falling rates is putting stress on both insurers and brokers,” said John Molka III, CFA, Advisen’s senior industry analyst and the author of the briefing. “Under more stable economic conditions, the market would be poised for a rebound. But economic turbulence is adding a new layer of complexity to the pricing cycle. We’ve identified the various forces at work on insurers’ top and bottom lines, and how those forces are likely to influence pricing and capacity in 2009 and 2010.”
“The Impact of the Economic Crisis on the P&C Insurance Industry” provides brokers, underwriters and risk managers with essential information about the unprecedented forces shaping today’s commercial insurance market. This 15-page Briefing is available for purchase through Advisen.
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