A premature call on the hard market

Business Insurance surprised me with this one:

U.S. commercial property/casualty premiums grew last year at their fastest rate since 2006 due to underwriting losses and “unfavorable reserve development,” SNL Financial said in its analysis of fourth-quarter statutory insurance data. The analysis includes data on reinsurance, investments, loss reserve schedules and other factors, the Charlottesville, Va.-based firm said in a statement.

Especially when it turned out I had read the SNL article (sub. req.) it quoted. SNL mentions “potential hardening in rates” in its lead but never directly comes back to support that fact.

To me the support for higher rates seems to lean on the fact that direct written premium was up 1.8% from Q4 2009 while net written premium was up 3%.

That could mean rates are rising, and there have been stories about rates ticking up among personal lines, though SNL doesn’t mention that. But most analysis shows commercial rates flat or decreasing.

Premium growth probably just meant customers bought more insurance last year. Industry premium had been falling because exposures decrease in recession. Fewer workers mean less workers comp premium, for example. As recovery creeps ahead, insurance premiums follow.

To me, SNL’s article is more interesting for the 104.75% combined ratio the industry posted in Q4 2010 (OK, the 95% of the industry that SNL has dumped into its databases). A year earlier, that number was 101.60%. If you exclude mortgage and financial guaranty and accident/health writers, those numbers are 103.72% and 99.58%.

For the year, the industry posted 102.29%, vs. 100.76% a year earlier – 101.11% and 99.60% excluding mor-fi and A&H. AIG’s huge reserve increases explain the fourth quarter change in results but not the change for the entire year – evidence that there might not be a lot of reserve releases coming in 2011.

That last may mean rates will be headed up soon. If managements can’t skinny down reserves anymore and won’t be bailed out by investment income, they will have to look to the market for revenue.

So SNL has a reasonable prediction. But I don’t think they’ve uncovered anything about the recent past.

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