Increased competition and industry turmoil have created a buyers market for most types of coverage, but fraud investigations and other factors may drive prices higher in the future.
THE MARKET FOR COMMERCIAL INSURANCE is undergoing a sea change. Prices are softening in most lines of coverage, but recent investigations into insurance-industry business practices have begun to change the way insurance brokers are compensated.
In October 2004, New York state attorney general Eliot Spitzer sued Marsh & McLennan Cos. of New York City, alleging that the brokerage firm steered clients to insurers with which it had lucrative payoff agreements and that it solicited rigged bids for insurance contracts. The case was settled out of court in January 2005 for a reported $850 million. However, investigation into fraud and anti-competitive practices in the industry continues. These developments will likely affect the prices that companies pay for insurance coverage.
Pricing in a Softer Market
When it comes to the market's financial state and policy prices, the general consensus is that the health of the insurance industry is improving, despite the spate of hurricanes in Florida during the summer of 2004. "Judging from industry profitability numbers, it does not appear that the catastrophic hurricane season will cause a major impact to the property [insurance] market," says Kirk N. Walsh, Charlotte, N.C.-based vice president of Risk International Services Inc., an insurance and risk management firm. Considering that insurers have had difficulty holding the line on property insurance rates in the past, Walsh expects continued reductions for most insureds and a gradual overall reduction in most lines.
According to the Risk and Insurance Management Society Inc. (RIMS) quarterly benchmark survey, average premiums declined during the first three quarters of 2004; many companies were able to renew their policies at rates comparable to, or lower than, those obtained the year before. In fact, prices declined in most major insurance lines, including directors and officers (D&O) liability, property, excess liability, fiduciary liability, and general liability. While prices for property, excess liability and fiduciary liability insurance dropped 2 percent to 3 percent in the third quarter of 2004, D&O and generalliability premiums dropped by slightly less than 1 percent.
Charles W. Soucy, a principal with Albert Risk Management Consultants in Needham, Mass., is optimistic for this year. He predicts that in most insurance lines, prices will continue to stabilize or fall by between 5 percent and 15 percent, and coverage terms will improve. "In some cases, insurers may be even more competitive in order to strengthen their foothold in a particular industry, particularly if a company has good historical loss experience," says Soucy.
Many other analysts agree that in 2005 prices will continue to fall in specific segments as the overall insurance market settles into a softer period. "Property insurance went soft earliest and continues to be soft," says David K. Bradford, executive vice president and editor in chief with New York City-based Advisen Ltd., which conducts the RIMS benchmark survey. "D&O continues to fall, even though it has a long way to go."
Ironically, if anything causes the D&O market to harden, it could be fall-out from the insurance industry investigations. After all, many of the industry's key players are divisions of publicly traded companies that could face shareholder lawsuits if these issues significantly depress share price and company performance. "I am somewhat less optimistic about the D&O market following the recent carnage in the insurance industry," says Walsh. "The D&O market has been seeking a reason to stem the rate decline for the past year and a half, and I think the imminent industry-related losses will give traction to their argument. …