Property Casualty Rates Dropping

July 2, 2004
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GRAND RAPIDS — Premiums for commercial property insurance fell by an average of 10 percent last year and have been projected to continue that trend this year.

According to the 2004 U.S. Property Report from the Aon Corp., an international risk manager and insurer, the rate drop came about because of improved investment returns and increased capacity for insurers, along with a “significant absence” of catastrophes in 2003.

“We said last year that the insurance market for commercial property in both the U.S. and Europe was balanced on the edge. There is no doubt that it now has toppled over with U.S. clients being the first to see the real benefits, as rates fell in 2003 by an average of 10 percent,” said Nick Maher, chairman of Aon’s Global Property Practice Group.

“We expect this trend to continue unless the market experiences a rapid upturn in either man-made or natural catastrophes, which in 2003 were at a remarkably low level,” added Maher.

So far, the trend toward fewer catastrophes has held up.

The Insurance Services Office Inc. (ISO), an information source for the property and liability industry, reported that first quarter losses stemming from five winter catastrophes cost insurers $963 million. In the first quarter of 2003, those losses totaled $1.48 billion, also from five catastrophic events.

Most of that loss — $660 million worth of insured property damage — came from four winter storms that occurred in January. The remainder, $303 million, emerged from tornados, hail, high winds and flooding that took place in seven southern and mid-Atlantic states.

In all, 230,000 claims were filed in the first quarter of 2004 — the lowest number since the first three months of 2001.

ISO also reported that catastrophic losses totaled $12.8 billion for property and casualty insurers in 2003 from 2.6 million claims and 21 major events last year. That dollar figure was lower than the $28.1 billion insurers paid out in 2001, the year of the terrorist attacks, but more than two times higher than the $5.9 billion they paid out in 2002.

Although 2003 ended up being the third costliest year for losses in the last 10 years, the number of catastrophic events was the second lowest since 1994. A catastrophe is defined as an event within a particular territory that causes at least $25 million in insured property loss and affects a significant number of policyholders and insurers.

Last month, ISO Chairman, President and CEO Frank Coyne said the biggest challenge that many insurers are likely to face in the coming years is simply being able to survive. More competition in the property and casualty markets is helping to lower premiums, even though he said the industry is suffering from lackluster profitability and loss-reserve deficiencies.

Coyne said rate increases peaked in mid-2002 and then dwindled to 4.9 percent last December, about a third of what the hikes were a year earlier.

“More significantly, first-quarter 2004 data from the Council of Agents and Brokers indicate rates are now declining,” said Coyne at the 76th Annual Insurance Accounting and Systems Association Conference held last month.

Coyne added that the property and casualty industry’s rate of return rose eight-fold last year.

But he also noted that rising from a base of just 1.1 percent in 2002 left the field with a 9.4 percent return rate last year, a figure well below the 13.4 percent rate Fortune 500 firms had in 2003.

Still, ISO said the industry’s net income after taxes rose to $29.9 billion last year, up from the $3 billion reported for 2002.

A few weeks ago, the U.S. Treasury extended the 2002 Terrorism Risk Insurance Act through 2005. The act requires insurers to provide coverage for losses caused by actions of foreign terrorists.

“The terrorism risk insurance program has been an important confidence builder as this country recovered from the attacks of Sept. 11 and the recession,” said Treasury Secretary John Snow to members of the hospitality industry last month.

“We think extending it makes good sense,” Snow added.

But Aon Managing Director Gary Marchitello said the jury was still deliberating whether the federal act was a good thing.

“Interestingly, the introduction of the U.S. Terrorism Risk Insurance Act has met with mixed reviews from both insurers and clients,” said Marchitello, “many of whom see it as inadequate in its coverage.”   

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