Commercial Lines Premium Analysis 2016

Construction, Small and Middle Markets, and Sun Belt States Led the Way

The commercial insurance market expanded 3.1 percent in 2016, with carriers writing $258.6 billion in direct premiums in lines covered by ISO MarketStance.1  The increase in direct premiums was mostly the result of exposure growth2 in small commercial (0–49 employees) and middle market (50–999 employees) risks, such as specialty trade contractors, building construction, real estate, and new and used car dealers. Insurers focusing on these sectors benefited from economic tailwinds, such as historically low vacancy rates, demographic shifts to multifamily housing, and record levels of single-family remodeling and vehicle sales.

Exposure growth averaging 4 percent or more in these small and midsized accounts counterbalanced a notably soft pricing environment in 2016. Construction led this increase, which was, by premium volume, the single-largest commercial lines segment, at $35.2 billion direct written premiums.

Anecdotal evidence reported in a recent CIAB broker survey—well supported by economic theory and empirical studies3—suggested that many insureds traded new coverages, lowered deductibles, and raised limits in response to rate reductions. This demand elasticity somewhat mitigated the challenging soft market environment, with particular lines such as cyber liability benefiting from the price-induced increase in demand for coverages of various types.

Nevertheless, soft markets proved a drag on many large- account-oriented (>1,000 employees) industries, such as manufacturing (at $28.9 billion in direct premiums, the second- largest industry sector), healthcare ($22.5 billion), transportation and warehousing ($18.0 billion), wholesale trade ($16.3 billion), and utilities ($4.2 billion). Flat or declining rates offset above- average exposure growth in manufacturing and amplified subpar exposure growth in healthcare, transportation, wholesale trade, and utilities, significantly depressing 2016 commercial market results.

Despite these significant headwinds in larger accounts, 2016 direct written premium growth was relatively broad-based, with five of the nine one-digit industry sectors expanding at or above the 3.1 percent pace of the commercial market.

Nearly half of the commercial lines growth in 2016 came from California, Colorado, and Florida and their respective Pacific, Mountain, and South Atlantic regions—where exposure growth was typically 1 to 2 percent above the U.S. average—as the long-term shifts of population to Sun Belt states for retirement, tech, and other reasons continued.

Following years of subpar growth in the weak recovery, direct premiums in New England’s construction, real estate, auto dealer, and administrative/technical services sectors grew at or significantly above the national average, led by states such as Massachusetts and New Hampshire.

On a coverage basis, 2016 downward rate pressures were most intense in property and workers’ compensation lines, which comprised more than 50 percent of the market by premium volume. These lines performed far more poorly than exposure growth alone would have predicted. On the other hand, liability lines—in particular, special liability errors and omissions (E&O) and cyber—saw robust 2016 exposure and premium growth, with significantly less rate pressure.

Looking ahead, if rate pressures continue to the degrees experienced in 2016 (and early indications are that they will) and exposure growth diminishes (as is expected in 2017), the commercial market will show substantially weaker growth—or none at all—in 2017. This will be the case at least for written premiums, accentuating the need for careful targeting and analytics by size, industry, class, and coverage.

  1. According to results modeled by ISO MarketStance for the following lines of business: Allied, Boiler & Machinery, Commercial Auto, Commercial Multi-Peril, Farmowners Multi-Peril, Fire, Inland Marine, Medical Professional Liability, Other Liability, Products Liability, Workers’ Compensation, and Excess Workers’ Compensation, as reported by U.S. domiciled carriers, the Texas Windstorm Insurance Authority, and estimated for alien surplus lines carriers; excludes personal inland marine, personal umbrella liability, and captive premiums.
  2. Industry, location, and account-size-specific estimates of 2015–16 rates of growth in the number of employees, payrolls, revenues, and property values appropriate for each of 20 separately estimated lines of coverage, weighted by 2015 direct written premiums reported in ISO MarketStance Commercial Insight (v16.1) products.
  3. For example, Michel-Kerjan, E., Raschky, P. and Kunreuther, H., “Corporate Demand for Insurance: An Empirical Analysis of the U.S. Market for Catastrophe and Non-Catastrophe Risks”, AEA (2010),  

2016 Commercial Market Growth

2016 Commercial Market Composition by Coverage

2016 Commercial Market Growth  by Size Segment

2016 Commercial Market Growth Top-5 Industries 2016 Commercial Market Growth  by Coverage