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Towers Perrin: After Nearly Five Years of Steady Decline, Commercial P&C Insurance Prices Are Essentially Flat For the Second Straight Quarter

Source: Towers Perrin

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Posted on 14 Dec 2009

Helped by firming prices in property and specialty lines such as directors and officers liability (D&O), commercial insurance prices increased slightly (0.3%) during the third quarter of 2009 -- representing the second consecutive quarter-to-quarter modest increase after nearly five years of steady decreases — according to Towers Perrin's most recent Commercial Lines Insurance Pricing Survey (CLIPS).

The survey conducted by the global professional services firm compared prices charged on policies underwritten by 35 participating insurance companies during the third quarter of 2009 to the prices charged for the same coverage during the same quarter in 2008. Commercial insurance prices also increased 0.8% during the second quarter of 2009 over the same quarter in 2008.

Only two lines showed price reductions in the quarter: workers' compensation and commercial auto. In both cases, the price decreases were minimal.

"Two quarters of flat prices underscore our belief that market conditions have changed from an environment of rampant price cutting to one where greater caution prevails," said Stephen Lowe, Managing Director of Towers Perrin's global property & casualty insurance consulting practice.

"Over the last few years, favorable claim experience caused many to believe that they had ample margins their prices, and could therefore afford to cut prices aggressively. Our view is that prices have now fallen to the point where profit margins are very thin. Since most companies now have price-monitoring systems in place, they can see that they are at the edge of the precipice — and they are reticent to cut prices further. The credit crisis and recession have also helped to create a more cautious environment."

"Looking forward, it's anyone's guess where the market goes from here," added Mr. Lowe. "We may be witnessing a new era, where better price monitoring information enables companies to manage prices with greater discipline. Alternatively, it's also possible that renewed pressure for top-line growth will cause prices to resume their downward trend, reflecting the cyclicality that has been typical in the past."

Prices for large accounts — those with premiums in excess of $50,000 — rose in the third quarter of 2009, while middle-market accounts remained basically flat. This upturn is not entirely surprising, as large accounts realized the greatest price declines in both 2007 and 2008, according to CLIPS findings. Small-account prices continue to show modest — but continually smaller — price decreases.

Year to date through the second quarter, accident-year 2009 loss ratios deteriorated 5% relative to 2008, according to CLIPS. Improvement in claim cost increase indications and the "earning" of price stabilizations taken in 2009 both contribute to the relatively modest 2009 loss ratio deterioration. This deterioration comes on top of an estimated deterioration for accident-year 2008 of 9% over 2007.


CLIPS data are based on both new and renewal business figures (when available) obtained directly from carriers underwriting the business, and indicate more conservative price reductions than other marketplace surveys. This particular survey compared prices charged on policies underwritten during the third quarter of 2009 to the prices charged for the same coverage during the same quarter in 2008.

CLIPS participants represent a cross section of U.S. property & casualty insurers that includes many of both the top 10 commercial lines companies and the top 25 insurance groups in the U.S. CLIPS' measurement of both pricing changes and loss ratio changes also sets it apart from other studies.

Participation in CLIPS has been increasing, as carriers believe it provides a more accurate picture of price changes and find it useful in setting assumptions for estimates of their claim liabilities.

The survey results track the differing trends in pricing across various regions, lines of business and account sizes on a quarterly basis. Historically, price level and loss ratio change results vary considerably by line of business and market segment.


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