A new survey by JP Morgan and Deloitte has confirmed what brokers have already told the world – increased competition is driving commercial insurance rates down, but not at a great rate.

And JP Morgan analyst Shane Fitzgerald says the industry needs to watch out it doesn’t head down the old and unprofitable track of relying on peaks and troughs in the insurance cycle.

The study confirms the industry’s views outlined in the National Insurance Brokers Association’s June market conditions questionnaire, and shows that domestic insurance lines recorded an average increase of 3% – the lowest in the survey’s 12-year history. 

Mr Fitzgerald says the drop in rates reflects the sector’s continued market stability. “On the other hand, commercial line premium rates have started to decline, with a weighted average reduction of 5%.”

Mr Fitzgerald says the softening in rates won’t have a direct effect on forthcoming results – that will take 12-18 months. However, the industry is showing signs of “doing its old thing” of cutting prices to an unsustainable level.

“Insurers are saying things are different this time, but if things were different the rates wouldn’t have come down at all,” he said.

The fact that competition has been the biggest factor in rate reduction is not surprising, given that combined ratios are at all-time lows. The largest reductions were recorded in the property and commercial motor vehicle classes. Professional indemnity, public liability, and directors’ and officers’ rates slightly rose.

“It would be reasonable to expect that reinsurance rates are also falling, thus helping to offset the reduction in premium rates,” Mr Fitzgerald said. “However, claims inflation is likely to be positive in each class of business, which will magnify the profit impact of falling premium rates.”

The survey report says competition could be described as rational, but the situation may quickly change if rates fall below profitable levels. “Many industry participants have argued over recent times that ‘this time around things will be different’. We hope this is the case, although at this point there is no concrete evidence to support the view, as the key driver will be industry discipline.”

But the survey has a serious message too. Estelle Pearson, General Insurance Practice Leader at Trowbridge Deloitte, says the industry should remember the tough times. “Given the increasing competition, both locally and offshore, it is important the industry remains disciplined and focused on keeping rates at technically correct levels.”

Peter Caldwell, Chairman of Deloitte’s National Insurance Group, says 75 underwriting agents in Australia place business with Lloyd’s. From 1999 to 2003 the amount placed increased by 237% from $250 million to $843 million. 

The survey – which included about 70% of local underwriters and 80% of brokers – didn’t take into account business written with unauthorised foreign insurers.