Ever notice just how frequently the local weather is a topic of conversation? This may in part be because no one is expected to do much about it, other than perhaps considering a relocation to San Diego for retirement. Among commercial lines insurers, dealing with the soft pricing cycle is pretty much equivalent to the weather— that is, grumble a bit about soft pricing but make little meaningful effort to adapt to it.

Granted that next week’s weather in Boston may be only marginally predictable.  However, the difference between Boston’s weather and San Diego’s is very predictable, and in property/casualty insurance, so it is with state-to state differences in insurable exposure growth— only far less discussed.

The remainder of this article will show how knowledge of insurable exposure growth differences from state-to-state influence premium growth and underwriting results—and how these differences can be used to optimize carrier planning and premium growth.

Commercial Lines Outlook

For most commercial lines of coverage, the forecast for 2013 remains clouded by the muted outlook for two of the major factors that drive premium growth: market rates and exposure growth. With respect to rates, the good news is that the long-awaited firming in commercial lines pricing has finally arrived.

The bad news is that the general recovery in rates has been sluggish relative to past pricing cycles. Indeed, the November and December 2012 commercial lines pricing surveys published by the Council of Insurance Agents & Brokers and MarketScout suggest that rate increases have topped out at about 4-5 percent for commercial coverages as a whole. A comparable pace of rate increase is widely expected for 2013.

The other part of the bad news is that the economic recovery from the Great Recession of 2008-09 has been similarly muted, in part due to overhang from the housing price bubble which led to the recession. Since the beginning of 2010, real GNP growth has averaged only 2.3 percent annual rate of growth as shown above. This slow pace of economic growth—only about half the of rebound from a typical recession— has significantly limited the growth in insurable exposures for most lines of coverage, thereby increasing carriers’ reliance on taking over existing accounts rather than writing new accounts to achieve premium gains.

Given the limited outlook for premium growth in the aggregate, some carriers have focused their attention on differences in renewal pricing between the major lines of coverage. As seen in Exhibit 2, property lines have recorded appreciably stronger renewal increases over the past two years than have the general liability-related lines.

Property lines’ firmer renewal pricing of 2011-12 arguably is due in part to these lines’ less severe insurable exposure declines during the 2008-09 recession combined with moderate bounce-back during the past two years. Although perhaps weaker than hoped for, property lines’ recent exposure growth suggests that at least some of insurers’ growth efforts in these lines have come through increases in insured values and new account sales, both of which help to sidestep the rate concessions that often are necessary to pull business away from current carriers.

Insurable Exposure Growth

Insurable exposure growth in property lines is expected to remain moderately strong over the next few years. In contrast, the insurable exposure growth recorded by other lines only recently has begun to strengthen. One marked exception is commercial auto, where exposure growth is expected to remain weak throughout the forecast period.

Impact on Premium Growth

Exposure growth’s impact on actual premium growth can be seen in Exhibit 4 focusing on commercial multiple peril coverage over the 2007-11 period. On a state-by-state basis, this exhibit compares the exposure growth estimated by MarketStance (horizontal axis) with the concomitant written premium growth recorded in the statutory data filings (vertical axis).

For example, South Dakota’s energy-fueled economic growth over this period created almost 7 percent exposure growth for businessowners packages and other CMP coverages, resulting in premium growth of about 12 percent. In contrast, Nevada’s housing bubble helped to cause a 3.5 percent decline in CMP insurable exposures over the 2007-11 period, and resulted in almost a 16 percent recorded decline in written CMP premiums.

It is important to note that 1 percentage point of exposure growth resulted in almost 2 points of premium growth in South Dakota. And in contrast, one percentage point of exposure decline resulted in more than 4 percentage points of premium loss in Nevada.

Admittedly, these are two of the most extreme states. However, the trend line shown in Exhibit 4 confirms that in general 1 percentage point of exposure change is accompanied by very nearly 2 percentage points of premium change in either direction.

State Considerations

For carriers seeking to expand their premium writings, this two-for-one rule provides an important cautionary note: premium growth is much, much easier to achieve in states experiencing positive exposure growth than is states recording negative growth. Although the rule may not be well known, the reasons for this behavior are widely recognized by carriers’ field staff: business taken away from another carrier typically comes at the cost of rate concessions while new or growing accounts often can be garnered while maintaining pricing discipline.

Also apparent in Exhibit 4 is the wide range of state-to-state disparity in exposure growth or decline over the 2007-11 reporting period. While the housing price bubble and the ensuing Great Recession were an important influence on many states’ exposure profiles (Arizona, Florida and Nevada come to mind), many other factors have been at work. For example, the energy boom associated with shale oil fracking markedly bolstered insurable exposure trajectories in other states such as Montana, North Dakota and even Pennsylvania.

The important thing here is that many of these secondary, more state-specific factors are well known, and their impacts on insurable exposure growth are readily predictable. In consequence, it is possible to forecast state-to-state relative exposure growth with more certainty than to predict next year’s aggregate national exposure growth.

These predictable differences in exposure growth can be used—and even relied upon—by carriers to enhance their premium growth strategies. By targeting knowable pockets of above-average exposure growth within their operating territories, carriers can exploit the pricing advantages inherent in new and growing accounts while avoiding the rate concessions that accompany business written in areas with soft or negative exposure growth.

While carriers cannot easily add new states to their territories—much less abandon states—they can readily modulate their growth objectives by state to take advantage of these predictable and quantifiable differences in exposure growth.