Commercial property pricing more competitive (August 16, 2005)

Canada’s commercial property insurance industry’s pricing has become increasingly competitive, according to a recent study be A.M. Best.
Direct premiums written increased only 1.5% in 2004, to approximately $5.25 billion, representing a rapid descent and unfavorable trend from 2002 when the growth rate peaked at 30%.
While the overall growth rate was low in 2004, many companies wither increased or decreased their direct writings significantly (up or down 15% or more). Some companies’ premiums decreased because they reduced their rates or because they decided to deemphasize their commercial property books because of softening market conditions. Others saw their premiums rise as they looked to increase their market share.
On average, the line of business represented 19.8% of total direct premiums written for commercial property writers compared to 20.5% in 2003.
Excluding the government-owned Insurance Corporation of British Columbia (ICBC), commercial property direct premiums written represented roughly 15.4% of Canada’s total p&c industry in 2004 compared to 15.8% in 2003.
Net premiums written were approximately $4.68 billion for 2004, a 7.5% increase over 2003.The growth in net premiums written was due to commercial property writers retaining a bigger portion of their gross business, approximately 65.8% in 2004 compared to 60.1% in 2003. More than three times as many companies reported taking higher net retentions on the commercial property line than those that reduced their retentions.
Underwriting results continued to reap the benefits of the last hard market. Although direct premium writings increased marginally, net premiums earned on commercial lines increased 13.9% to C$3.62 billion for the year.
The increase was due to a combination of more companies retaining a higher percentage of their gross business and the premium growth of 2003 earning out in 2004.
The net loss ratio trended downward to 43.0%, a 7.0-point decrease from 2003.While net premiums earned for the total Canadian commercial property industry grew at a healthy rate, net incurred claims decreased 4.2% to C$1.96 billion. The decrease was attributed to more efficient claims handling, prudent expense management and fewer significant catastrophic events. For direct writers, net incurred claims increased modestly by 1.7% to $1.60 billion as higher retentions marginally offset the gains achieved through more disciplined underwriting.
The trend of declining premium rates appears to be continuing into 2005 and A.M. Best Co. says it anticipates that underwriting results will slip several points. Although commercial property overall has been profitable, the desire for more market share could potentially result in relaxed underwriting standards, which leads to further increases in the net loss ratio.