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3 factors driving insurance rates higher

Captives|Casualty|Risk & Analytics|Corporate Risk Tools and Technology|Financial, Executive and Professional Risks (FINEX)|Property

By Vittorio Pozzo and Marc Paasch | November 26, 2019

In the first quarter of 2019, insurance rates rose 2% on average and appear to be on the rise for the foreseeable future.

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About our ‘Insurance Market 2020’ series

In this two-part blog series, we cover some of the factors that are driving insurance rates higher and strategies organizations can use to keep risk management costs in check.

After years of mostly falling or flat insurance rates, we are now seeing signs of a hardening insurance market. In the first quarter of 2019, rates rose 2% on average, according to our latest Insurance Marketplace Realities report. And prices rose in nearly all commercial lines, with the notable exception of workers’ compensation, according to the report, which also notes a minimum of a 20% rate increase on energy coverages and higher marine rates.

What’s driving rate increases?

We are seeing three principal factors that could be driving insurance prices higher: structural channels for insurers, slower growth of alternative risk capital and higher losses among insureds.

Structural challenges among insurers

Most carriers are struggling to meet their cost of capital, and insurer productivity has barely moved over the past decade, according to a McKinsey report. And they face other structural challenges.

While some lines of business have seen years of steady top-line growth, insurance carriers in mature markets have been particularly hard hit by the low-interest-rate environment. Therefore, the majority of carriers are not meeting their cost of capital. In fact, the industry is in the red in terms of average economic profit, with huge disparities in performance among the profitable carriers and the rest of the pack.

Unlike other industries, which have been able to capitalize on their investments in digital technologies, insurance hasn’t increased its overall productivity in the past 10 years. As insurers struggle to sustain growth, the pressure to boost performance has become intense.

Growth of alternative risk capital abating

If we look at the alternative capital market, which refers to reinsurance and retrocession products backed with money from capital-markets investors, including insurance-linked securities, collateralized reinsurance and industry loss warranties, rather than traditional reinsurers, the growth of alternative reinsurance capital abated in 2018 for the first time since the global financial crisis, according to an analysis performed by reinsurance brokers.

Willis Re noted in its renewals overview that the insurance linked securities (ILS) market is facing a "more comprehensive test" and that some ILS products, mainly those providing aggregate catastrophe and retrocession cover, "have performed poorly for investors, thereby resulting in less available capital." Willis Re also pointed out that the variation in ILS funds' exposures to different product types "is starting to impact the ability of many funds to attract new investors."

Higher-than-expected losses

Higher-than-expected losses are also driving insurance prices higher. According to the 2019 A.M. Best Market Segment Report, the reported combined ratio for the property & casualty insurance industry has been above 100% – indicating an underwriting loss – the first time since 2016. In 2017, the combined ratio reached 104%.

If these losses continue, rate increases will follow. Securing coverage may become more challenging. Essentially, we may be looking at a hard market.

What’s driving higher-than-expected losses?

With property insurance, natural disasters are mostly to blame. An A.M. Best report says that Hurricanes Harvey, Irma and Maria contributed to near-record high U.S. catastrophe losses in 2017, with net catastrophe losses of $53 billion. Then in late 2018, the U.S. was hit with Hurricane Michael as well as the California wildfires, resulting in net catastrophe losses of more than $37 billion.

With both property and auto insurance, emerging technologies such as smart features, artificial intelligence and robotics have created new liability and cyber exposures, while also increasing the cost to repair/rebuild. The emergence of the shared economy has further complicated the risk outlook.

The market may also be hardening for general liability, errors and omissions, directors and officers, and employment practices liability insurance, where an increase in litigation is leading to large losses. To see how lawsuits are changing, consider the Securities Class Action (SCA) numbers.

According to Risk & Insurance, SCA claims have skyrocketed. In 2015, there were 208. In 2017, that number jumped to 412. In 2018, it remained steady with 403 claims. Claims involving cybersecurity mismanagement and the #MeToo movement appear to be a big factors behind the sharp increase.

What should businesses expect in a hard market?

In a soft market, insurance premiums are relatively low and coverage is readily available. Companies can expect to find policies with high limits fairly easily. In a hard market, premiums increase and underwriting requirements tighten. Insurers are reluctant to write policies with broad coverage and high limits. A carrier that wrote some company business in the past, may not have the capacity to offer coverage going forward.

In some situations, it may be difficult to get any carriers to offer a quote. We are also observing examples across the insurance market, where major insurers are applying strategies that may challenge some corporates; among others, the Lloyds Remediation and Decile 10 Strategy released in 2018, where the insurance giant announced a much tougher stance on loss-making syndicates.

Companies should expect an environment where on one hand the premiums become more expensive and on the other there may be lack of sufficient coverage from the traditional insurance markets, as insurers resist the pressure to broaden coverage, maintaining an eye on adequacy of premium rather than "throwing in" extras. Hence, businesses looking for savings on insurance premiums are expecting challenges in pursuing their cost cutting strategies due to the premium increase trend that is observed in a hard market.

In our next article in the series, we’ll cover strategies for managing a hardening insurance market.


Director - Europe & Great Britain, Captive Advisory Team

Managing Director
Global Head of Alternative Risk Transfer Solutions
Global Head, Strategic Risk Consulting

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