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Advisen: Soft Market to Continue, Challenges Continue for Insurers, Brokers

Posted on 05 Apr 2010

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The recession may be over, but recovery is not happening quickly enough for insurers and brokers, according to a new report from Advisen. Despite capacity for insurance being abundant in most lines, the demand for capacity has been undermined by recessionary effects.

With unemployment rates hovering at about 10% and rising business bankruptcies, the lingering effects of the recession are chipping away at commercial lines insurance revenue. According to the report, a material rebound in 2010 seems unlikely.

Additionally, the soft market is showing few signs of changing direction. The average commercial lines premium fell about 2% in 2009, and likely will fall by a similar amount in 2010, said Advisen.

“Decreased demand as a result of the damaged economy will keep rates from rising in 2010,” said Dave Bradford, an Advisen executive vice-president and author of the briefing. “In addition premium volume for lines of business that are based on factors such as payroll and revenues will continue to be suppressed by the lingering impact of the recession. It is going to be a challenging year for insurers and, especially, brokers.”

Brokerage firms, which derive most of their revenue from commissions on insurance premiums, continue to take a hit from depressed written premiums. Decreased brokerage income has forced many brokers to streamline operations and reduce headcount. According to Bradford: “Financial pressure is likely to fuel more consolidation in the brokerage sector as stronger companies scoop up struggling companies at bargain prices.”

Organic growth turned negative during the first three quarters of 2009, though profitability remained relatively stable for the largest firms.

While property/casualty insurers faired relatively well in the financial crisis, plummeting stock markets, deeply eroded rate levels and $26bn in insured catastrophe losses, wiped out tens of billions of dollars in policyholders’ surplus and led to a 96% plunge in profitability in 2008.

Resurgent stock markets and a year devoid of large natural catastrophes helped to replenish surplus and re-inflate profits in 2009. According to Fitch, most of the 52 insurers and reinsurers tracked by the rating agency reported double-digit returns on operating capital and an aggregate 28% increase in GAAP equity.

As premium volume falls, insurance companies consider new avenues for growth, explained Bradford. “Insurers are looking for new areas to deploy their excess capacity. The continuing soft market further encourages insurers to introduce new products and move into new markets. New products and markets can provide new revenue streams, but they can also cause erratic insurer results.”

In theory, an economic slowdown can have a positive effect on claims experience in some lines, said Advisen. Lower transport miles, for example, should translate into fewer commercial auto claims. Workers’ compensation claims are subject to both positive and negative influences; higher unemployment can mean there is a lower claims frequency, but also may encourage more fraudulent claims from employees concerned about job security.

Advisen expects the most likely scenario for 2010 will be a continued soft market. The recession will suppress demand for insurance capacity and, as a result, the market will remain comparatively overcapitalized. Some policyholders will see modest rate increases, but on average rate levels will erode slightly in most lines.

A hard market may begin in 2011, but in the absence of large catastrophe losses it is unlikely that it will be characterized by sudden and severe premium hikes. Rather, rates will rise slowly and erratically, predicts Advisen.