After the terrorist attacks of Sept. 11, 2001, commercial property and casualty insurance rates rose for several years.
Then, beginning in 2005, rates began to soften and have consistently fallen ever since.
Increased competition between commercial P&C carriers has helped drive rates down. Many carriers actually budget to lose money on their P&C rates, industry insiders say, earning returns on investments instead.
However, lowered earnings from investments over the past year could result in commercial P&C rates flattening or rising over the next 18 months, industry insiders say.
“Insurance companies often project to lose money on insurance (rates) in anticipation of hitting their margins off investment income,” said Robert McIntyre, branch president with The Horton Group, a Chicago-based insurance broker with a Pewaukee office.
“If they have large loss levels with low investment levels, rates will rise.”
Ben Salzman, president and CEO of Sheboygan-based Acuity, a P&C carrier that operates in 18 states, agreed.
“Enough companies will be feeling significant pain, not now, but next year that prices will stabilize,” he said. “In two to three years you’ll see prices coming up again.”
It will take a period of sustained economic losses before rates rise because many commercial P&C carriers have large cash reserves, said Kevin Steiner, president and chief operating officer of West Bend Mutual Insurance Co.
“The industry still has a lot of capital and until that is depleted the market will still be competitive,” he said. “What will give is if earnings are poor over a long period of time. Then rates will go up.”
Ken Riesch, president and CEO of Waukesha-based R&R Insurance Services Inc., agreed that rates will take time to rise. Many carriers are trying to delay rate increases as long as possible in order to maintain or grow market share, he said.
“I don’t think our clients will be getting rate increases for the foreseeable future,” Riesch said. “It will be on the radar screen – all (carriers) will be watching everyone else to see who’s getting what. They all have a pretty good idea of who’s buying business and who is not. June and July have been very competitive months. Everybody’s trying to hold the line on renewals.”
However, rates will begin stabilizing some time soon, Riesch said, and are likely to rise later.
“There are so many factors (that affect commercial P&C rates), including the stock market,” Riesch said. “That’s why I’m saying we will not see a lot of difference in 2008. But maybe in 2009 we will see rates start to flatten out and firm up a bit.”
The recent flooding in Wisconsin and the Midwest will not affect commercial rates, Steiner said. However, they will impact residential rates.
Most P&C carriers base the loss estimates on a five-year analysis of natural disasters. While estimates for Wisconsin and the Midwest had loss provisions, carriers did not plan for large losses like those experienced in late May and June, largely because the area had relatively few natural disasters in recent years.
And higher loss ratios in personal lines will drive up rates in those markets, Steiner said.
“When you show losses in the personal, auto and home lines, naturally prices will go up,” he said.
The flooding in Wisconsin and other Midwestern states may have an indirect impact on commercial rates, Riesch said, which could be compounded by wildfires and winds in California, earthquakes in China and other natural disasters.
“2008 is turning out to be a tremendous year for cap losses,” he said. “And that will start affecting the reinsurance market. As carriers go to renew their reinsurance contracts, if the capacity dries up and the people investing in that market go elsewhere, you will see a firming market sooner rather than later.”
Pressure from shareholders could also cause rate increases, Riesch said.
“The thought process of companies, particularly those that are stock companies and their stock holders are demanding a return on investment, was not the case in the 90s,” he said. “That’s a management mindset that may also cause this market to firm up also.”
Pressure to increase sales of new policies has increased pressure on insurance brokerage houses, McIntyre said, which has driven both mergers and acquisitions within the field and the number of available candidates to hire.
“I think most of my peers would say there are more opportunities for acquisitions than a year ago and more producer candidates on the street than a year ago,” he said. “The growing pressure (to increase sales) is a result of the inability to grow revenues. That inability gets compounded with the continual soft market. And as agencies have difficulty in succeeding, their only plan is to sell the agency.”