Construction Insurance
Construction Insurance Rates Rising
Doug Rieder
March 22, 2012
The long-anticipated end to the “soft” market in commercial insurance appears to have arrived.
My conclusion is based on the Goldman Sachs semi-annual Insurance Pricing Survey, which covered opinions during the previous 12 months. The survey found that commercial property and casualty rates turned positive for the first time since 2000 — meaning rates are rising.
The good news is that “hard” markets tend to be very short in duration and normally act as leading indicators of economic recovery. In addition, our experience has shown that increases in the market are running a tempered 2 percent to 5 percent on low loss business, though significantly higher on accounts plagued by poor loss experience, high hazards or CAT exposed locations (e.g. coastal areas, storm plagues locations, etc.).
In insurance, a “hard” market refers to conditions under which carriers begin to raise rates to increase premiums paid per dollar of exposure insured. This typically comes after a protracted period of falling prices.
Ideally, the money collected in premiums is invested for a return that will add to the net result of subtracting losses and overhead from premiums collected. A positive number represents an underwriting profit and a negative number indicates an underwriting loss. In times of underwriting losses, a favorable investment climate may more than offset a negative number and still allow the carrier to obtain acceptable end results. Conversely, when investment returns are suppressed like they are now, carriers are unable to offset/improve their underwriting results with investment returns.
An additional factor in carrier profits is the availability of loss reserve reductions, called favorable loss development. This occurs when actual results come in at less than the carrier estimated. These estimates are carried on their books until paid.
In general, the Pricing Survey data suggest that favorable loss development has run its course.
Many people expected the hardening to occur sooner in the recession. However, when the credit markets and economy crashed in 2008, there was such a pronounced drop in the demand for insurance that carriers could not push up rates unless they were willing to significantly reduce their market share. In competitive markets this is difficult to do, especially for the publicly traded insurers. However, now that the economy has stabilized with interest rates at extremely low levels due to the easy money policies of the Federal Reserve (which are expected to continue through 2014), carriers don’t have much choice but to increase rates to satisfy shareholder demand for return on equity.
The Goldman Sach’s study confirms this trend in the marketplace and makes the following observations:
• Commercial property and casualty rates turned positive for the first time since 2000.
• Rate increases appear to cross all account sizes, terms and conditions are tightening against the insureds and there are signs of reduced competition among carriers.
• Unlike the turn in pricing post 9/11 when hard increases of 30 percent to 45 percent were common due to rising loss trends and a catastrophic hit to industry capital, the current trend appears to be more tempered.
• Due to extremely low interest rates, carriers (who invest mostly in fixed rate instruments (e.g. bonds) have little incentive to accept thinly priced business and must look to make money on underwriting.
SOURCE: www.bizjournals.com