Insurance Marketplace Realities 2019 Spring Update

Executive summary

April 23, 2019

Answering the call for discipline

For decades, we’ve heard calls for discipline from the carrier community. When rates, particularly property rates, kept falling, even in the face of accumulating catastrophic loss, and alternative capital as well as traditional capital competed for market share and drove rates down to the brink of unsustainability, we heard calls for discipline. When the 2017 hurricane season brought us the trio of Harvey, Irma and Maria (HIM), setting several unfortunate records and inspiring hard-market predictions that proved exaggerated for most, we heard calls for discipline. In such sectors as airlines, where rates fell for years on end (sometimes by double digits), we heard calls for discipline. Industry observers would have been forgiven for comparing these calls to those of a junior high school teacher dealing with some rowdy 12 year olds or exasperated parents baffled by their teenagers. The calls weren’t heeded. In the insurance marketplace, most buyers were happy.

As we head into Q2 2019, that appears to be changing.

There is a clear trend across most lines of business and most geographies that insurers are taking steps to return to underwriting profitability. We are seeing price firming almost universally. While capital remains plentiful, insurers are demonstrating their long-sought pricing discipline as they exercise more judicious deployment of capacity. The price firming is of course more prominent in some lines and geographies than in others. For example, wind exposures in the Caribbean and coastal U.S., airlines and primary D&O for public companies are seeing some eye-opening double-digit hikes. Certain sectors have been hard hit by losses and are experiencing what could be called rate spikes — global construction projects, power, downstream energy and health care professional in the U.S. But the firming trend applies even in more benign areas.

Several factors have come together to bring about this turn of events.

Supply-side pressures

On the supply side, a major carrier recently made a change in strategic direction and is pulling back on capacity. While there is ample capacity to replace it, underwriters are aware that such a high profile retraction creates a pool of buyers in need of capacity, which helps put underwriters in the driver’s seat.

Loss numbers are another major driver. HIM didn’t dramatically turn the market and the loss events of 2018 won’t either, not in the sense of an old school hard market, but 2017 and 2018 set records for consecutive loss years, with 2018 contributing major cat losses and an even more notable upswing in non-modelled losses, particularly California wildfires. Moreover, “loss creep” for HIM (i.e., actual losses rising over time to levels higher than originally reserved) seemed to have caught some by surprise.

Another contributing factor is worry that climate change could mean a steady rise in the frequency and severity of nat cat losses. The spring flood season in the heart of the U.S. is the freshest reminder of how big our seasonal losses can be when Mother Nature may be out of balance.

While cat losses bear down on property, liability has faced similar pressures. A consistent drumbeat of large verdicts keeps hitting umbrella, health care professional, executive risks lines and the loss leader of the past several years, auto.

A turn in the insurer attitude

Many believed the market would turn hard after HIM, but the industry recapitalized so readily that the rate spikes that did follow were narrowly focused on cat-impacted risks. However, the fizzling of a widespread hike in prices planted the seeds for a different underwriting attitude at the bargaining table. Underwriters seem to realize that the prospect of a hard market and the promise of a premium windfall may forever stay elusive. And now the market has turned — toward disciplined underwriting.

In the current environment, if carriers don’t think they can underwrite profitably, they are willing to walk away. They are willing to withdraw capacity. They are being consistent. They are being careful. They are scrutinizing their portfolios and the risks they are underwriting. They’re being…well, disciplined.

We see it here in North America and also in London, where the Lloyd’s Decile 10 initiative shows signs of succeeding in its goal of pushing the industry toward profitability and discipline. Brexit is another factor at play across the pond, where withdrawal — should it finally happen — may add to U.K. insurer administrative costs as well as lead to potentially costlier FCA and/or EU regulations.

Carriers are also reconsidering how they deploy chunks of capital. In lead umbrella, we’re seeing large-scale withdrawals and limit reductions from major players.

We are also beginning to see some impact of insurer consolidations. In the fall of 2018 we noted that M&A action was generating headlines but not having much impact on rates. That is changing in pockets, particularly in some specialty lines (e.g., aviation, cargo and energy) where capacity has shrunk considerably. We expect insurer consolidations to continue in 2019.

Meanwhile, InsurTech, which should create downward pressure on price by improving efficiency, remains peripheral.

On the demand side, several factors are sending buyers into the marketplace to seek capacity. In the U.S., in particular, ongoing vibrant economic activity means more production, more construction, more goods in transit, more cars on the road and more workers at work — and at risk. A brisk economy can heighten not just the aggregate risk, but the severity of risk as well, as greater pressure on production lines often means less time for maintenance and more opportunity for human error. A near-full employment economy also means that the pool of skilled labor may not be deep enough, which can put under-qualified workers in roles where mistakes can bring losses. Greater activity also yields greater exposure to business interruption claims. And the same concern about climate change and exposure to cat loss that is giving insurers pause is pushing buyers to the marketplace. These demand-side trends impact both property and casualty.

What’s the response in a seller’s market?

So what does all of this mean for the insurance buyer? It doesn’t mean we have a hard market, but it does mean we have a seller’s market. For the younger people in the risk business, this may be the first such seller’s market they’ve seen.

And what do we do about it? What’s required of the risk manager to deliver the risk transfer solutions this complicated marketplace offers? In a word, discipline. From the disciplined determination of risk tolerance, to planning a sound risk transfer strategy and the execution of that strategy, buyers will need to be prepared, think ahead, do their homework — follow a diligent, disciplined approach. In the submission process, this will mean accurate, detailed analytics that tell the most compelling story; careful building of relationships in a global marketplace where some risk takers will be more interested than others in making various kinds of deals; and finally, being smart.

Overall, insurance buyers in 2019 can expect to pay more. They can expect a heightened, more disciplined underwriting approach. They should also expect their insurance advisor to be disciplined and proactive throughout the year, assisting with analytics, driving the risk differentiation that underwriters seek, and building relationships in the global marketplace. There is risk-taking capacity for virtually all risks, but it might not be next door — it could be in London, Europe, Bermuda or even Asia. The partnership between the risk manager and the global risk adviser/broker has never been more vital. for helping a risk manager’s organization protect itself and thrive.

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 last fall to those we are presenting in these pages, we are seeing wide — though not across-the-board — upward pressure on pricing. In casualty, rates are rising for liability lines, while for workers compensation, where rates had been declining, we are predicting a mix of small increases and decreases. For property, rates are ticking a few percentage points upward even for buyers not facing cat risks (NB: for those with significant cat exposures and/or adverse losses, the rate hikes are in the double digits). In 10 lines, upward predictions in our last issue have been revised further upward. In only two have we predicted some easing.

Here are highlights from our predictions for 2019:

  • Forecast auto rate increases are holding at +6% to +12%.
  • The high end of predicted rate increases for D&O jumped from +5% to +10% since the fall.
  • Declining rates are predicted in two lines: international casualty, where decreases are still expected but less than those seen last year, and surety, where modest softening is forecast.
  • In trade credit risk, despite areas of volatile risk exposure around the world, predictions of occasional small increases have given way to expectations of mostly flat renewals.
  • Anticipated increases for senior living and long-term care risks continue to lead the top end of predicted rate hikes, with +5% to +30% forecast.
  • Beyond rate hikes, many of our experts are pointing to a more careful and demanding underwriting environment ahead.

In short, most buyers can expect a more challenging marketplace for the rest of 2019.

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

Commercial rate prediction charts

For 2019, 14 lines are expecting increases.

  Trend Range
Auto Increase (Purple triangle pointing up) +6% to +12%
Cargo Increase (Purple triangle pointing up) +2.5% to +15%
Casualty Neutral increase (yellow line with purple triangle pointing up) Flat to +4%
Directors and officers Neutral increase (yellow line with purple triangle pointing up) Flat to +10%
Employment practices liability Neutral increase (yellow line with purple triangle pointing up) Flat to +5%
Energy Increase (Purple triangle pointing up) +2.5% to +20%
Errors and omissions Increase (Purple triangle pointing up) +5% to +10%
Fidelity Neutral increase (yellow line with purple triangle pointing up) Flat to +5%
Health care professional liability Neutral increase (yellow line with purple triangle pointing up) Flat to +10%
Marine Neutral increase (yellow line with purple triangle pointing up) Flat to +15%
Political risk Neutral increase (yellow line with purple triangle pointing up) Flat to +40%
Product recall Neutral increase (yellow line with purple triangle pointing up) Flat to +5%
Property Neutral increase (yellow line with purple triangle pointing up) Flat to +15%
Senior living and long-term care Increase (Purple triangle pointing up) +5 to +30%

Two lines are expecting decreases

  Trend Range
International casualty Neutral decrease(Green triangle pointing down with yellow line) –5% to Flat
Surety Decrease (Green triangle pointing down) Softening

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

  Trend Range
Aviation Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –10% to +15%
Cyber risk Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –3% to +5%
Construction Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –10% to +20%
Environmental Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –10% to +15%
Fiduciary Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –5% to +5%
Kidnap and ransom Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –5% to +5%
Terrorism and political violence Neutral (yellow line) Flat
Trade Credit Neutral (yellow line) Flat
Workers Compensation Neutral decrease increase (green triangle pointing down, yellow line, purple triangle pointing up) –2% to +2%

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

Publication issue Decreases Increases Mix/flat
2019 spring update 2 14 9
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 that 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.