by Linda Folger CPCU, CIC, ARM, Partner
Our property casualty team of advisors is frequently asked to don our forecasters’ hats and look into the future to describe the state of the market and its impact on insurance premiums in the coming year. Undoubtedly the cyclical nature of property casualty pricing presents a constant unknown and is a source of frustration to those of you attempting to create a realistic budget for your insurance and risks costs. In an effort to assist in the development of your strategic plans and budgets for the coming year, we offer the following overview of the current property casualty climate and our prediction for the resulting impact on pricing levels.
Property casualty pricing cycles alternate between periods of soft and hard market conditions. In hard market cycles, coverage is harder to place and premiums grow, often at exponential rates. Soft market cycles are characterized by stable or falling rates and coverage is usually more readily available. There are a number of factors which affect these cycles, including economic downturns, catastrophic events, insurers’ claims reserve dollars, and supply and demand. Pricing cycles also vary by lines of coverage and geographic location. For example, the pricing and underwriting approach for property coverage for businesses on the coast are currently quite different than for those located inland and this trend is much more pronounced for property coverage than for liability coverage.
The current market would most accurately be described as soft from a pricing and availability perspective. This is the result of record levels of policyholder surplus in 2006, minimal catastrophic activity in 2006, and phenomenal industry profit levels in 2006. In fact, the industry combined ratios have been trending downward since 2001 to a record breaking level of 93.2% in 2006, down from 115.8% in 2001. As a result, we anticipate a significant amount of pressure on pricing in 2007 and 2008. For most businesses, we believe it is safe to assume that reductions in pricing will be part of the renewal cycle over the next two years.
The exception to the notable soft market pricing is the coastal property market, where capacity constraints have been generated by new wind modeling techniques that are being applied throughout all areas of the nation. North Carolina is in a precarious position as the wind pool is significantly under-funded relative to the exposure that exists. If a major storm hits a heavily concentrated area, we will see dramatic adjustments in pricing and coverage terms for coastal properties.
In summary, the state of the market is strong and we anticipate that trend continuing. It is imperative that buyers utilize a strategic approach to maximize the available opportunities from both coverage and pricing perspectives. Our team of property-casualty experts can work with you to determine potential cost reduction strategies to limit exposures and reduce premiums through both risk transfer and non-risk transfer solutions. The market may fluctuate, but we want to be your broker of choice. If you are interested in reviewing your coverages and risk management strategies, it will be our pleasure to assist you with this process.