The Insurance Market in 2010: The Lingering Impact of the Recession on Capacity and Pricing
Economists generally agree that the Great Recession has ended, but recovery will be slow. Unemployment hovers at about 10 percent, and business bankruptcies are well above long-term averages. As a result, the commercial lines insurance industry has seen revenue fall, with little hope of a material rebound in 2010. Additionally, the soft phase of the insurance pricing cycle shows few signs of loosening its grip. The average composite commercial lines premium fell about 2 percent in 2009, and likely will fall by a similar amount in 2010. Brokers, which derive most of their revenue from commissions on insurance premiums, have been especially challenged by declining written premium. Organic growth turned negative during the first three quarters of 2009, though profitability remained relatively stable.
With several noteworthy exceptions, property & casualty insurers were largely unscathed by investment losses directly attributable to the meltdown of the subprime mortgage market in 2007. However, plummeting stock markets, an outcome of the ensuing global credit crisis, combined with deeply eroded rate levels and $26 billion in insured catastrophe losses, wiped out tens of billions of dollars in policyholders' surplus and led to a 96 percent plunge in profitability in 2008. Resurgent stock markets and a year devoid of large natural catastrophes helped to replenish surplus and re-inflate profits in 2009. According to Fitch, most the 52 insurers and reinsurers tracked by the rating agency reported double-digit returns on operating capital and an aggregate 28 percent increase in GAAP equity. GAAP equity is another measure of insurer capacity, similar to policyholders' surplus.
Commercial lines insurance buyers can plan on a competitive insurance market for 2010. Capacity is abundant in most lines, and the demand for that capacity has been diminished by the recession. However, the seeds of the next hard market have been sown, and above-average catastrophe losses could lead to a sudden reversal of the market cycle.
About FM Global
More than one of every three FORTUNE 1000 companies, and similar size organizations around the world, turn to FM Global (www.fmglobal.com) to develop cost-effective property insurance and engineering solutions to protect their business operations from fire, natural disasters and other types of property risk. FM Global ranks #766 among FORTUNE magazine's largest companies in America and is rated A+ (Superior) by A.M. Best and AA (Very Strong) by Fitch Ratings. The company has been named "Best Property Insurer in the World" by Euromoney magazine and "Best Global Property Insurer" by Global Finance magazine.
