Hard Times, Soft Market

Perhaps one of the only positives of the so-called "Great Recession" is that it has meant a continued soft market for commercial insurance rates. In 2009, the recession created a reduced demand for insurance and, coupled with a quiet natural catastrophe year, this led to overcapacity, particularly in property/casualty insurance. And where there is overcapacity, there are reduced premiums, which is good news for policyholders.

According to the 2010 RIMS Benchmark Survey, conducted by Advisen, with premiums down 3.7%, the total cost of risk (TCOR) per $1,000 in revenue dropped an average of 3.1% in 2009. Companies with less than $1 billion in revenue saw the biggest savings as their TCOR fell 5.9%, while larger companies experienced the average 3.1% decrease.

Workers compensation costs were also down, and although some of this drop was due to overcapacity, the numbers can also be explained by reduced payrolls and regulatory reforms, particularly in Texas and California. Overall, the average premium per $1,000 of revenue dropped 9.8% and the average premium per employee was down 4.9%.

Considering the legal trouble many banks and other financial institutions found themselves in during the last few years, it is no surprise that D&O costs have risen sharply for financial companies. Banks were named in about half of all securities-related suits in 2008 and one-third of securities-related suits in 2009, making it a busy couple of years for D&O claims. As a result, the average D&O premium per $1,000 of revenue jumped a whopping 68.5% for these institutions between 2008 and 2009.

Overall, however, premiums are down. This is an ideal situation for most policyholders because, according to survey participants, price is the number one deciding factor in selecting an insurer. Second is the reputation of the insurer, followed by their mix of services, incumbency, geographic coverage and risk management information systems.

As we head into 2011, uncertainty abounds. The economic situation can best be described as precarious. Meanwhile, there have already been a significant number of costly natural catastrophes and the BP oil spill will cause billions of dollars in insured losses. Despite these factors, survey findings argue that there is still so much capacity in the market that rates are unlikely to harden in the near-term. But if forecasts for an active hurricane season prove true or another disaster strikes, all bets could be off. For now, however, it seems that insurance buyers can breathe easy.