Commercial Insurance Prices Increase for Second Straight Quarter

Towers Watson’s “Commercial Lines Insurance Pricing Survey” (CLIPS) reports the increases are not enough to keep up with reported claim cost inflation levels.

Workers compensation and commercial property showed the most significant price increases, with workers compensation continuing this trend for the third consecutive quarter, after four quarters of flat pricing in 2010. Commercial property prices increased for the second consecutive quarter, primarily influenced by global catastrophes earlier in the year.

However, CLIPS data indicate loss costs increasing by 4% year-to-date, relative to 2010. Combined with the effect of earning premiums written in prior quarters at close to flat rates, this loss cost trend translates to a 4% loss ratio deterioration estimate for the first three quarters of 2011. This indication is, however, somewhat more favorable than the estimated 5% level of deterioration for the full accident-year 2010 loss ratio over 2009.

“The fact that prices have been moving upward for the past two quarters is a positive sign,” said Bruce Fell, managing director of Towers Watson’s Property & Casualty practice in the Americas. “This is an indication that pricing discipline is being maintained in the market, further underscored by the fact that nearly three quarters of P&C insurance CFOs in a recent Towers Watson survey said they believe market prices were at the bottom or turning upward. However, while rates are hardening, loss costs also continue to rise. Our view is that until rate increases exceed loss cost inflation, we will not be in a market where insurance company results can improve and we start to enter a real hard market.”

Price increases were again observed across all account sizes for standard commercial lines, but were more pronounced for mid-market and large accounts. Survey results were mixed for specialty lines, with directors and officers liability showing significant price reductions for the seventh consecutive quarter.

Survey results also continue to corroborate the expectation that carriers using predictive modeling for pricing/risk-tiering and risk-selection achieve greater price increases (or smaller price decreases) than those that do not. Findings from CLIPS reveal that more than 50% of reported premium volume corresponds to companies reporting use of predictive-modeling for pricing/risk-tiering, and more than 30% corresponds to carriers reporting use of predictive-modeling for risk-selection.

CLIPS data are based on both new and renewal business figures obtained directly from carriers underwriting the business. This survey compared prices charged on policies underwritten during the third quarter of 2011 to the prices charged for the same coverage during the same quarter in 2010. For the most recent survey, data were contributed by 39 participating insurance companies representing approximately 20% of the commercial insurance market (excluding state workers compensation funds).