Research

Insurance Marketplace Realities: Overview

2018 Spring Update on Commercial Insurance in North America

April 12, 2018

Toward a smarter marketplace

It appears we in the insurance industry have an answer to a fundamental question we’ve been asking ourselves for several years now: Is the hard/soft cycle — catastrophic losses creating rate spikes followed by gradual retrenchment and price easing — no longer the main economic force driving our industry? The answer is yes.

Between HIM, the acronym given to the one-two-three hurricane punch of Harvey, Irma and Maria, and the California wildfires that followed, the latter half of 2017 brought record-breaking losses. In the marketplace response, property rates rose, steeply for buyers with catastrophe exposures and losses, but no insurer insolvencies resulted. The rate increases are already beginning to moderate, with some decreases again becoming possible for better risks. The swiftness with which the industry recapitalized was something of a marvel, especially to those of us who have lived through past insurance cycles and seen plenty of chaos, carrier failures, pricing upheavals and the creation of new insurance start-ups.

Commercial rate prediction charts

For 2018, ten lines are expecting increases

  Trend Range
Auto Up +5% to +9%
Casualty No change or slightly up Flat to +4%
Employment practices liability No change or slightly up Flat to +5% (–5% to flat on excess
for mid to large companies)
Energy Up +5% to +10%
Environmental Up +10% to +20%
Errors and omissions No change or slightly up Flat to +5%
Health care professional liability, senior living and long-term care Up +5% to +20%
Product recall No change or slightly up Flat to +5%
Property Up +5% to +20%
Trade credit No change or slightly up Flat to +5%

Two lines are expecting decreases

  Trend Range
International casualty Down –5% to –10%
Political risk No change or slightly down –2% to flat

Ten lines are predicted to deliver a mix of small increases and decreases or flat rates

  Trend Range
Aviation No change or slightly up Flat to +5%
Cyber risk No change or slightly up/down –3% to +5%
Construction No change or slightly up/down –5% to +15%
Directors and officers No change or slightly up/down –5% to +5%
Fidelity and crime No change Flat
Fiduciary No change or slightly up/down –7.5% to +5%
Kidnap and ransom No change or slightly up/down –5% to +5%
Surety No change Flat
Terrorism and political violence No change Flat
Workers compensation No change or slightly up/down –2% to +2%

So, what does this mean?

For insurers, it means they (and their investors) can’t rely on the old market cycle to produce long-term gains. They will have to increase their income by providing better, more valuable products and doing so more efficiently. We see four transformative steps insurers are already taking to make this happen:

  • Growing larger and more strategically diverse through mergers and acquisitions
  • Cutting expenses through technology and automation
  • Underwriting more selectively and individually in a more disciplined approach
  • Creating innovative solutions for emerging risks along the lines of cyber solutions that combine insurance, preparedness and incident response support

Examples of the M&A activity include the AIG-Validus deal and the proposed AXA-XL combination, offering the acquirers broader, multiple platforms and a return into business lines they had previously exited. The Ace-Chubb merger is now old news but remains another resonant example. The breadth of these global companies offers new opportunities for growth and a greater resilience against regional activity, including the regulatory and tax changes that affect the movement of capital.

In cutting expenses, insurtech has put us on the cusp of what could and should be dramatic reductions in the human and financial resources spent on the administrative side of the business: the billing, the policy and certificate issuance, and the claims adjusting and paying mechanics. Increasing investments in artificial intelligence and secure transactional technologies, such as blockchain, hold out a promise to squeeze costs while improving product quality, service times and responsiveness.

In underwriting, we have heard for a long time about the need for more discipline. Yet, this discipline has mostly referred to the desire of insurers to hold the line on rates during long soft markets — which the laws of supply and demand usually would not allow, given the influx of new and traditional capital lifting supply while creating downward pressure on prices. Now, we are hearing more about being selective and treating risks individually. We are being encouraged to walk away from risks if the numbers don’t look right and pushing only modest rate increases that the marketplace will bear. True, this approach could prove to ring hollow, but in the immediate aftermath of 2017’s losses, insurers that took a broad-brush approach did not succeed. Selective, careful underwriting appears to be succeeding.

In regards to innovation, the cyber example is the clearest demonstration of how new risks need new responses. For other perils, such as climate change and the reputational risks that keep business leaders up at night, creating typical risk transfer solutions has not been easy. We would suggest that the big data revolution could offer avenues for quantifying risks that have been difficult to quantify before, and creative thinking will offer ways to create products that will find an eager audience.

For buyers, all of this is good news. In the short run, buyers may see prices rise in response to undeniable loss trends. We are seeing a continued uptick in auto rates as losses keep growing. In general liability, loss trends may be creating similar upward pressure on pricing. For property, the increases we saw in Q4 — not the skyrocketing drama many predicted, but still notable — are already lessening.

We are optimistic because we see a marketplace that will continue to enjoy an influx of capital, which, in the absence of record-setting catastrophic losses, will depress prices. Moreover, we see a marketplace that will provide more value for the risk mitigation dollar as analytics, new products and data-driven, case-by-case underwriting hone in on the needs and objectives of individual buyers.

For brokers, these trends are also good news. As always, our role is to bring insurers and buyers together in the way most useful to buyers. As new products develop and underwriting becomes more sophisticated, the advice we offer will be more essential. But make no mistake, the need for efficiency in the administrative aspects of our business is an imperative for brokers as well as underwriters.

Technology will underpin much of this progress, freeing up underwriters to innovate, customize products and exercise judgement in assessing risks. It will also free up brokers to offer the analysis and perspective that will ensure buyers achieve the greatest value.

Artificial intelligence and the data it is built on will play a growing role in our industry, as will human intelligence. The old cycle may be a thing of the past, but the new paradigm will create a more efficient and smarter marketplace.

Joseph C. Peiser
Head of Broking
Willis Towers Watson North America
Senior Editor
Insurance Marketplace Realities

Looking forward, looking back

Comparing our rate predictions from Fall 2017 to those we are presenting in these pages, we see more lines expecting increases. However, the predicted rate increases on property are lower now, thanks to the resilience of the marketplace and the swift influx of capital. For general liability, umbrella and excess casualty lines, we forecast rates to rise by small amounts but incrementally higher than the price rises we predicted last fall. Workers’ compensation rate predictions are mostly flat, while auto rates, reflecting loss trends, are expected to rise more steeply — in some cases nearly into double digits.

For more on the recent movement in commercial insurance rates, see our Commercial Lines Insurance Pricing Survey 2017 Q4 data.

Most buyers can expect their insurance spending to rise in 2018, though the dramatic predictions of eye-popping increases that came in the wake of the record-setting 2017 catastrophes are now behind us.

Overall, ten lines are expected to see price increases, two will see decreases and ten will see a mix of both (or flat renewals).

Market trends: lines facing increases, decreases or a mix

MR issue Decreases Increases Mix/flat
2018 spring update 2 10 10
2018 7 7 9
2017 spring update 10 6 7
2017 10 6 7
2016 spring update 9 8 5

The 2018 spring update figures reflect the absence of marine in this issue; the 2017 figures reflect the addition of international coverage as a separate line; and the 2018 figures reflect the addition of product recall and the subtraction of employee benefits, which are no longer covered in this report. In this issue, casualty lines are discussed in one combined report but are included in this table as separate items.

Two lines that were seeing reductions last fall have changed direction. For directors and officers insurance, small decreases have shifted toward a range of single-digit increases to small decreases depending on risk profile. For environmental coverages, predicted decreases have flipped, and most buyers can expect these rates to rise.

For more insight on how you can prepare for a marketplace in flux, contact your local Willis Towers Watson representative.