December 17, 2009 by Canadian Underwriter
The best products and best underwriting methodology for liability risk are no substitutes for adequate pricing, according to a Swiss Re sigma study.
Prices should reflect escalating claims trends and the uncertainties of a rapidly changing technological and legal environment, says the study entitled Commercial liability: a challenge for businesses and their insurers.
Businesses spent roughly US$142 billion on liability insurance worldwide in 2008. More than half of the global commercial liability premiums were in the United States at US$77 billion, the study reports. The United Kingdom generated US$12 billion in commercial liability premiums in 2008.
Canada ranked fifth, generating US$4.9 billion in liability premiums.
“After a few profitable years, there is a risk that insurers again [are underpricing] the business,” the study’s author, Thomas Holzheu, said in a release.
Because claims tend to occur over a longer period of time in liability insurance, insurers have to price in the rising claims trend and the huge risks involved in this business.
“Under-reserving, which usually goes along with underpricing, is very dangerous both for insurers’ long-term profitability [and] for policyholders, since it undermines the sustainability of insurance protection,” Holzheu said.
“Commercial liability rates are declining in all markets, especially in the U.S. since 2004. Meanwhile, prices continue to fall in all liability lines of business.
“Because interest rates are low, business cannot be cross-subsidized with investment results; therefore, prices should instead be increasing.”