Commercial insurers may lose money from underwriting policies in 2008 as they accelerate years of price cuts, said Shivan Subramaniam, chief executive officer of business insurer FM Global.
“Rates were falling faster than what all of us expected,” Subramaniam said in a recent interview. “It’s accelerating because everyone’s coming off of a great year. There’s more capacity available.”
Prices for coverage are falling after successive hurricane seasons left the U.S. untouched by major storms. Coastal areas on the Gulf Coast and Eastern seaboard are seeing the steepest rate cuts after prices rose following the record losses from Hurricane Katrina in 2005, Subramaniam said.
Commercial insurance rates in the U.S. fell 14 percent in the first quarter from the same period a year earlier, according to a survey by the Council of Insurance Agents and Brokers. Profit margins, measured in the insurance industry by a metric called the combined ratio, could shrink to zero even if the U.S. is spared from major storms for another year, Subramaniam said.
FM Global, based in Johnston, is the operating name for Factory Mutual Insurance Co. The company is owned by its policyholders.
“If we have another subnormal year, maybe we might just break even,” he said. “With the price levels coming down the way they are, if you figure that the average combined ratio for the commercial insurers last year were 90 percent, and if you assume prices are down the way the surveys say, that 90 percent we had last year automatically becomes more than 100.”
A combined ratio over 100 indicates an underwriting loss.
Premiums for commercial coverage have fallen for 17 consecutive quarters, the Washington-based council of insurance agents said in the survey results released last week. The steepest decline for business coverage was in large accounts, where prices fell almost 16 percent, CIAB said.
Reinsurance companies, which sell backup protection to insurers, are also lowering their rates. The decline in such coverage allows insurers to lower prices further, and may prompt FM Global to forgo issuing a catastrophe bond this year, Subramaniam said. ”Our treaties don’t renew until July, and that’s about when we will find out whether it makes sense to use the cat bond market or just use the reinsurance market,” he said. While a catastrophe bond provides an insurer with guarantees of being repaid in the event of a loss, buying reinsurance is “a lot easier to do.”
He added, “If the pricing works out right and we can deal with the credit issues in terms of credit-worthiness, then we’ll automatically go to the reinsurance markets.” •
