Chart of the Day: Rates at the bottom

Evidence that a hard market is around the corner, if it’s not already here.

This chart, from a paper (pdf) by Shaun Wang and Jessica Leong, shows p/c insurance written premiums as a percentage of private sector GDP. Wang and Leong call this “total premium share” and use it as a proxy for rate increases, and on a macro level it works pretty well, picking up the hard markets of the mid ’80s and 2001-2002.

Now the Wang/Leong paper is not about rate adequacy. It was written to develop stochastic formulas to describe the underwriting cycle. Those formulas would drive a company’s capital model. But this chart seems to imply that rates fall to a certain floor (around 3.3% of private sector GDP), then rise.

And it shows that as of the end of 2009, rates were at or near bottom. Later in the paper, Wang/Leong model the next few years, forecasting slight rises each year (though the uncertainty bounds made it clear that rates could continue to fall).

Of course, there’s no discussion say why rates would bottom out at that particular point. Thinking about it in stock analyst jargon, it’s a technical indicator – like a head and shoulders or cup and handle pattern.

But in a stable industry like p/c insurance, one could argue that when premium gets that low, companies begin to realize rates are inadequate and begin to adjust accordingly.

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