Despite some positive rises in premiums, not all business classes are bouncing back

Is the market beginning to harden? There have been some encouraging signs in recent weeks that premiums are starting to rise.

A recent analysis of commercial lines trading data by software house Acturis reveals that average premiums are beginning to increase in some classes for the first time in months.

In commercial combined, for instance, the year-on-year average premium is now 99% of the value in 2007, up from 96% in 2008. Additionally, the year-on-year comparative by quarter shows the average premium in the second quarter of 2009 to be 5% more than in the same period last year.

Meanwhile, according to Acturis, average premiums in property owners business were up 6% in the second quarter of 2009 compared with the same period last year. This is in stark contrast to the 17% fall in average premiums in the first quarter of 2009 compared with a year earlier.

These are positive signs. But there remain reasons to be cautious. Looking at the Acturis data, other classes of business are not showing the same spring as commercial combined and property owners. The average premium for package business is still declining, with the average renewal premium down by nearly 5% year-on-year (tempered by a near 3% year-on-year increase in new business rates).

Indeed, judging by some of the comments made by the chief executives of the UK’s largest insurers during the recent interim results season, there is still serious concern that rates are not rising as much as expected, which does not bode well for this year’s and next year’s full-year results.

Take AXA chief executive Philippe Maso, for instance. He noted: “We have been expecting rates to increase on commercial lines for more than 18 months. It has not happened as expected.”

Allianz UK chief executive Andrew Torrance commented: “While there have been some positive signs in that direction, I am somewhat disappointed that, in the second quarter, the market did not push on from the rate rises applied during Q1 of this year.”

He added: “Rate momentum must be regained as we progress through the remainder of the year if insurers are to make acceptable underwriting profits in 2010.”

But fundamental market and economic issues are making consistent rate increases difficult. A glut of spare capacity as insurers dump unprofitable business, coupled with fierce competition for new business, are acting to suppress rate increases. New entrants have added to the pressure in certain classes, such as fleet.

Rate increases have also been tempered by a declining demand for insurance – the result of the recession – and by the prevalence of large, powerful brokers and networks.

So while it appears we are at – or approaching – the bottom of the premium cycle, a return to a hard market could still be some way off.

Key points

  • Average premiums are rising year-on-year in some classes
  • But there are still weaknesses in pricing in others
  • Insurer chief executives have warned that rates are not increasing as fast as expected and that this will hit profits if not rectified
  • Spare capacity, fierce competition between insurers, and depressed demand for cover are tempering efforts to raise rates