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The long soft market in insurance has been good for CFOs, but hard on agents and brokers.
David M. Katz, CFO.com | US
January 19, 2010
In a topsy-turvy financial world, commercial insurance premiums have kept on a steady downward course. The trend continued in the fourth quarter of 2009, with prices for liability coverage declining and property insurance holding steady, according to a new survey of 1,100 risk managers.
The survey, which was conducted by research firm Advisen and the Risk and Insurance Management Society, calculated average changes in organizations' insurance costs as of the date they renewed their current policies.
Workers' compensation and general liability insurance premiums dropped most sharply, with prices dipping by 5.5% and 5.0%, respectively, from the same period a year ago. Directors' and officers' liability prices dropped by 2.8%, while property insurance premiums fell by less than half a percentage point.
Chances are that insurance markets will continue to soften through 2010, says David Bradford, executive vice president of Advisen. But what's good for buyers is bad for brokers: as insurance rates have fallen, so have commissions and fees. What's more, the global recession has cut into premium volume as companies downsize or go out of business.
At Aon and Marsh, two of the three biggest publicly traded insurance brokers, total revenues for the nine months ended September 30, 2009, dropped by about $200 million and $300 million, respectively, compared with the same period in 2008. The third top broker, London-based Willis Group Holdings, saw a 5% rise in its international fees and commissions during the first nine months of 2009 offset by a 5% drop in North America. "Our North America and UK and Ireland retail operations have been particularly impacted by the weakened economic climate and continued soft market with no material improvement in rates across most sectors," said Willis's third-quarter 10-Q.
In its third-quarter 10-Q, Aon specified three ways the recession has reduced broker income. One, there is less risk to insure: corporate asset values have shrunk, including "property values, shipment volumes, payroll and number of active employees." Two, clients have exhibited "cost-driven behavior" that has led them to slash their insurance budgets. Three, a number of Aon's specialty sectors have been hammered, including financial services, construction, private equity, and mergers and acquisitions.
Like brokers, insurers have seen a decline in premium income, but that has been offset by income from invested assets and the absence of a major natural catastrophe in the United States in 2009. The U.S. property & casualty insurance industry posted a 4.5% return on average surplus (assets minus liabilities) for the first nine months of last year, according to the Insurance Information Institute.
Although finance chiefs should expect bargains in insurance markets to continue, there is a risk, says Bradford: the cheaper premiums become, the more extreme their rise could be if catastrophe should strike.
And although the hurricane season doesn't officially start until June 1, it isn't too soon to start thinking about what might happen to premiums if there is a repeat of 2005, when Hurricanes Katrina, Rita, Wilma, and Dennis struck the United States. Back then, a strong stock market buttressed the insurance industry following those storms, and premiums continued to soften. Now, insurer finances are much weaker, points out Bradford, meaning they would have to raise prices in the wake of similar disasters.