P&C insurance companies are in a tough spot right now. According to a recently released Insurance Services Offices report, their margins have dropped below break-even. Investment income has fallen through the floor, and the commercial mortgage backed securities market hasn’t even begun to take the hit that analysts predict it will. On top of that, premiums are shrinking, not rising. Not only are rates still dropping but so are the sales and payroll numbers on which the premium rates are computed. As reported in BestWire
… the recession has left commercial insurance buyers with fewer employees and fewer risks to insure. “Our customers are smaller than they were a year before,” [Mario P. Vitale, chief executive officer of global corporate for Zurich Financial Services] said.
How does the shrinking customer impact rates? As succinctly explained by Steve Tuckey:
Any serious decline in exposure units, whether it is employees, fleet vehicles or buildings, will make raising prices more difficult because more capacity is chasing fewer such units. And it will also make year-over-year numbers less than impressive even if prices do rise …
This makes infinitely more sense than Marsh’s Brian Duperreault who, along with other industry cheerleaders, has discovered an “invisible hard market”:
But other factors are at work, he added, combining to undermine any positive impact. Thus, he said he coined the phrase “‘invisible hard market,’ because we cannot see its normally positive effects for the industry.”
With available exposures to insure on a steep decline during a deepening recession, he said, “that means no dramatic change in the top line—which, combined with falling investment income, means no dramatic impact on the bottom line, either.” As a result, he observed, “the instant gratification that usually comes from a hard market won’t be available this time around.”
Still, for the moment at least, “[insurance] supply has gone down more swiftly than demand,” due to “staggering investment losses” for many carriers, he observed, prompting insurers to raise prices to compensate.
Small problem, however, is that, talk of underwriting discipline notwithstanding, rates aren’t rising; they are just falling more slowly than before. This focus on first and second derivatives, often decried by blogger Felix Salmon, seems designed to make everyone feel better about dismal statistics. There are exceptions (e.g. financial industry D&O cover) but they won’t carry the whole industry.
These falling rates are below levels analysts deemed inadequate before 2009 began. According to MarketScout:
“At the end of every year we calculate the rate adequacy of the property and casualty industry,” said Mr. Kerr, “According to our calculations, the property and casualty rate index fell [7 percent] below ‘rate adequacy’ in the fourth quarter of 2008.”
In January, MarketScout declared the beginning of the end of the soft market but hedged its bet: “It may take as much as a year for rates to actually start increasing but the soft market trend has turned.” In other words, rates should rise, they just aren’t.
If only wishing could make it so.