Research

Insurance Marketplace Realities 2019

Executive Summary

November 6, 2018

A stealth firming of the liability market amid headline-grabbing mergers and acquisitions

During 2018 most eyes were on the property market following the catastrophes of 2017. While the property market proved resilient, thanks to the stabilizing impact of alternative capital, two separate trends that followed are currently impacting market conditions for insurance buyers. The first is a relatively modest but definite rise in rates across most liability lines of insurance in response to relentless loss activity, which, given all the worry over property rates, seemed to sneak up on us. The second trend is a resurgence of mergers and acquisitions among insurers, and particularly “mega deals” (i.e., deals exceeding $1 billion).

Much has been written and speculated regarding InsurTech, but let’s bring it back to what Insurance Marketplace Realities is all about: How will it affect what you pay for insurance?
Read more

First, let’s consider rates. Across most lines of insurance (U.S. workers compensation and international liability programs are notable exceptions), insurance buyers can expect increases in the low single-digit to low double-digit ranges. This trend, most consistent in the liability lines — auto, umbrella, D&O, EPL, professional, environmental, etc., is loss driven. Increases in frequency driven in part by rising economic activity and increases in severity driven in part by changing societal views on corporate accountability, and the success of what’s often called “reptile” tactics by plaintiffs’ attorneys, have forced rates upward. Below is a snapshot of the rating environment that is more fully explained in the individual summaries that you can find by clicking on each line.

Commercial rate prediction charts

For 2019, 14 lines are expecting increases

  Trend Range
Auto Increase +6% to +12%
Cargo No change or slightly up Flat to +15%
Casualty No change or slightly up Flat to +4%
Directors and officers No change or slightly up Flat to +5%
Employment practices liability No change or slightly up Flat to +5%
Energy Increase Flat to +10%
Environmental Increase Flat to +15%
Errors and omissions No change or slightly up Flat to +5%
Marine No change or slightly up Flat to +15%
Political risk No change or slightly up Flat to +5%
Product recall No change or slightly up Flat to +5%
Property No change or slightly up Flat to +10%
Senior living and long-term care Increase +5 to +30%
Trade credit No change or slightly up Flat to +5%

Two lines are expecting decreases

  Trend Range
International casualty Decrease –5% to –10%
Workers compensation No change or slightly up –4% to flat

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

  Trend Range
Aerospace No change or slightly up/down –10% to +10%
Cyber No change or slightly up/down –3% to +5%
Construction No change or slightly up/down –5% to +20%
Fidelity and crime Neutral Flat
Fiduciary No change or slightly up/down –5% to +5%
Health care professional liability No change or slightly up/down –7% to +10%
Kidnap and ransom No change or slightly up/down –5% to +5%
Surety Neutral Flat
Terrorism and political violence Neutral Flat

Now let’s consider insurer M&A. If you’re an insurance buyer and you’re watching your screen for the next merger and acquisition headline (whether it involves insurers, brokers or other service providers), you may be wondering what it means for you and your industry. In the largest sense, the news is good. For the most part, insurer M&A — our focus here — has not had a materially negative impact on capacity or pricing. The emerging, consolidated insurers bring a broader product offering, greater geographic scale and the promise of efficiencies, both technological and otherwise. We forecast that this M&A trend will continue during 2019 as insurers seek tactical, strategic and, in some cases, transformational combinations.

For additional global perspective, see our recent report, Transformation in the global insurance market.

Why now?

To start, organic growth is difficult to achieve. After the HIM (Harvey, Irma, Maria) trio of storms of 2017, the last believers in the old hard market/soft market cycle have likely stopped waiting for the loss events that will dramatically turn the market. The rise of alternative capital has changed the fundamental supply curve for catastrophe risks and perhaps more. Organic growth in a mature, competitive marketplace is achievable but is unlikely to deliver the results that get most investors excited. Then where does growth come from? From inorganic growth and synergies that promise improved margin.

Secondly, the money is there. A slight uptick in rates following 2017’s mega losses, relatively light losses in 2018 (Hurricanes Florence and Michael and Asian typhoons notwithstanding) and good performance of investment portfolios have pushed policy holder surplus to record highs. Companies have cash and capital. In addition, the private equity market has an interest in insurance and the wherewithal to drive deals. According to research firm Preqin, the PE industry has $1 trillion of so-called dry powder.

Third, changes to the U.S. tax structure have altered the playing field significantly. Besides contributing to the cash stores companies have on hand, the changes are being felt in a global context. The long-time role of Bermuda is evolving along with the tax incentives for doing business there. It’s no accident that some of the biggest mergers have involved Bermuda-based companies. The lowering of corporate taxes has also made U.S.-based companies more attractive to potential overseas buyers.

Fourth, those overseas buyers are also ready for their own reasons. European companies are finally over the whirlwind that surrounded the implementation of Solvency II, so they can now turn their focus outward. China, of course, has shown a growing interest in insurance at home and abroad (whether the potential for an all-out trade war with the U.S. changes that dynamic, at least in terms of the U.S. marketplace, remains to be seen), and Japanese companies have been active in the M&A space as they seek revenue outside of their domestic markets.

Fifth, the rising interest rate environment makes insurance companies attractive targets, as the capital that insurance companies accumulate during the course of business can earn higher returns and thus improve overall return on equity.

Finally, the technology arms race and the rise of InsurTech have been drivers of M&A. When seeking inorganic growth, insurers consider the acquisition of technology platforms and talent, along with the revenue, customers and scale (e.g., Travelers and Simply Business).

The M&A pump is primed.

The impact

What does this mean for insurance buyers in North America? As we’ve said, recent M&A has not had a material impact on rates and capacity, but it is reducing the number of competitors in the field. Given the capital fluidity that is the industry’s “new normal,” we don’t foresee a dramatic impact on rates, but we do expect that consolidations will result in more underwriting discipline, which may serve as a backstop against another free fall in rates.

Perhaps a less obvious, but important effect of carrier combinations is in claim handling philosophy. Carriers have different approaches to handling claims. The strictness with which policy language is enforced, for example, can vary considerably, even in cases where policy wordings are similar. In the case of a merger, the culture of the acquiring company will usually come to dominate and, for insureds used to dealing with the acquired company, the claim experience may bring some surprises. A risk advisor with experience in handling claims with both legacy companies might offer useful perspective, and possibly help ward off such surprises.

Another source of growth

In addition to organic and inorganic growth, surely another path to growth is InsurTech. Some see the rush of investors into various corners of this growing field and sense a widening bubble that could well burst like the tech bubble of the late 90s. That bursting, however, did not stop the world from going online. We certainly expect to see M&A and partnership activity with InsurTech in mind, particularly with regard to consumer and small business insurance, as companies develop the digital ecosystems that almost certainly represent the future of our industry.

M&A is likely to continue in our industry, for reasons that are tactical, strategic and transformational — or all three. What that will mean, buyers, is change: changes in risk management options that could require changes in risk management efforts. Insurance and risk advice have long played a key role in navigating such changes. That much, at least, is unlikely to change.

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 spring 2018 to those we are presenting in these pages, we expect a continuation of modest price rises. In casualty lines, these increases should be in the low single digits; for property, increases could be a bit higher for programs affected by losses, though not as steep as the rate hikes immediately following 2017’s mega losses, and some property buyers will be able to renew flat.

Here are some lines that have seen their forecast changes since last spring:

  • Forecast auto rate increases are edging up into the low double digits at their top end.
  • Workers compensation predictions call for flat renewals to small decreases for the first time since 2011.
  • For directors & officers buyers, the occasional decreases predicted last spring are past, and small increases are now forecast.
  • Political risks saw a reversal, from small decreases to single-digit increases, due to the heating up of international tensions.
  • Environmental insurance buyers are facing slightly better conditions, with rates expected to be flat or rise by up to 15%; better than the +10% to +20% range predicted in the spring.
  • Health care professional rates are now expected to offer a mix of decreases and increases, a departure from a long period of steady incline.
  • In aviation lines, a brief respite in price declines is over; now buyers can expect a mix of declines and increases.

In short, most buyers can expect their insurance spending to rise in 2018.

Overall, 14 lines are expected to see price increases, two will see decreases and nine will see a mix of both (or flat renewals).

Market trends: lines facing increases, decreases or a mix*

MR issue Decreases Increases Mix/flat
2019 2 14 9
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 2019 figures reflect the addition of marine, cargo and senior living/long-term care as separate lines of business. 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.

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

For a more retrospective review of the recent rating environment see our Commercial Lines Insurance Pricing Survey data.