Commercial property rates unlikely to rise for some time

Rates for commercial property insurance are unlikely to rise significantly any time soon despite attempts by some companies to talk up the market, according to an assessment by actuarial consultancy EMB.

The firm’s analysis of London market players has found that, whilst some property insurers do need price increases, a reasonable proportion of the market is already making appropriate returns on their underwriting, and has done so for the last couple of years. This applies to both UK and Internationally focussed insurers.

“The market is not going to move just because some commercial property insurers want it to,” said EMB director Mike Hood. “The fact is that many of their competitors are achieving profits and do not need to hike up prices, making it impossible for the rest to go it alone.”

EMB analysis found nearly a 20-point spread in underwriting performance between the strongest performing and weakest groups of insurers during 2009 and over the previous five years. The firm identified better use of data, superior risk selection and more effective purchase of reinsurance as the main differentiators.

Two thirds of the leading Lloyd’s property players made an average 18-point underwriting margin in 2009 and 9 points over the five years to 2009, a period with some very significant cat losses. The others lost 5% over the five years and only managed to break even last year, the most cat-free year for some time.

The UK company market shows a similarly large gap between the good and the also-rans, although on average performance is worse than Lloyd’s both in 2009 and over the last five years.  The company market has broken even over the last five years, but the top quartile has averaged a 13 point underwriting profit

“Overall, the property market had a good year in 2009 and, even though the first quarter of 2010 was very difficult for some, there probably isn’t enough pressure to generate a material increase in rates,” said Hood.
“The Chilean earthquake is proving more expensive than first estimated and could cost London international property insurers 5% to 15% of their gross premium, but this together which the smaller Xynthia loss is still unlikely to increase general rates. Perhaps the anticipated bad hurricane season and wet UK summer on top of this would prompt a change”.

He added that, whatever the state of the market, risk managers of well run organisations could improve their negotiating position through the prompt, comprehensive and detailed provision of exposure data. Even with a bad loss record, convincing evidence of remedial action and lessons learned may sway underwriters.

“The increasing use of enterprise risk management by insurance companies, driven to a large extent by Solvency II, has strengthened the already substantial advantage generated by being able to give your broker or underwriter high-quality information,” he said.

“Solvency II is forcing insurers to further increase the quality of their exposure data and the understanding of their exposures. Some are increasingly reluctant to look at risks with poor data. While there are markets that will underwrite with poor quality information, there is normally a material price to pay.”