Primary rates up in Jan as insurers predict further hardening

Insurance rates have been rising for the first time in years following 2017’s heavy catastrophe losses, with insurers arguing this is likely to be the start of a longer-term market hardening. But with excess capacity still sloshing around both the primary and reinsurance markets, it may well be that any increases are dampened or shortlived. On releasing XL’s 2017 results, Mike McGavick, the group’s CEO, reported overall rate increases of about 3.5% for insurance and about 5% for reinsurance at January renewals. He said loss-affected accounts have seen double-digit rate increases. Gregory Hendrick, president of property and casualty at XL, said loss-impacted property business saw the highest primary increases, of more than 15%, followed by non-loss-impacted property with rises of between 5% and 15%. Casualty rates were also up, in the low single digits, he noted. Professional lines ranged from flat to plus 2% generally, with some larger increases on some of XL’s international business, added Mr Hendrick. XL believes we are seeing the start of a slow turn in the market, where each line will react differently. But Mr McGavick said the overriding direction of travel is increased pricing. “The aggregate should continue to point toward more consistent and more sustainable rate levels,” he predicts. In a conference call with analysts, Chubb CEO Evan Greenberg said rates started to go up in the third quarter of 2017 and increased further as the year progressed. While property saw most increases, casualty rates were up a touch too, he noted. “I believe we are in a transition market globally. And rates should continue to firm as the year goes along. Although, not all classes and not in all countries or territories,” Mr Greenberg said, according to a transcript from Seeking Alpha. “Major account rates overall were up 1% for the quarter, improving to up 1.9% by December and they are… stronger in January depending on class. Property rates were up over 7.5% in the quarter, improving to up 10% by December. Casualty rates were essentially flat in the quarter, improving to up 1.5% in December,” said Mr Greenberg as he reported net income of $3.9bn for Chubb in 2017, a fall of 6.6% from 2016. Wholesale excess and surplus lines saw a similar story, he continued. “Rates overall were up 2.7% for the quarter, improving to 4.8% in December. And again, they are as strong in January. The property rates were up 2.8% in the quarter, improving to up 6.3% in December. Casualty rates were up 3.8% in the quarter, improving to up 4.6% in December. And unlike in major accounts, financial lines rates were up 2.3% in the quarter, improving to up 5% in December,” he explained. Delivering its full year results, Zurich reported that rates were up over the year in all major regions of the world, but increases were minor. In a slightly different outlook to rivals XL and Chubb, Zurich forecasts a stable market over the next 12 months for core European and US non-life business. Writing in JLT’s Risk Specialist publication in December, Paul Knowles, CEO of JLT Specialty, said there has been a push for “more realistic pricing of catastrophe risk and an end to discounts” across all markets. But while underwriters are clearly determined, the market’s response to last year’s natural catastrophe losses is not comparable with the hard markets that followed large losses in 2001 and 2005 because of significant surplus capital, he added. “As a result, we continue to see a highly competitive market and one with continued excess capital. The fundamental dynamics attracting capital to the insurance market, mainly the low interest rate environment, remain valid,” Mr Knowles said. He predicts that the theme in early 2018 and beyond is “likely to be one of inconsistency across different classes of business, geographies and markets”. According to Loïc Le Dréau, vice president and manager of global sales at property insurer FM Global, there has been an uptick in insurance rates in Europe, which sees the bulk of January renewals, as well as the US. “Usually the US market is a little bit more reactive than the European market, but nevertheless we have seen in Europe that it is time to make some corrections. It is on a case-by-case basis. But globally and in Europe there is change, not a massive change but movement. We have reached a point where the relationship in some cases is not fair anymore,” Mr Le Dréau told Commercial Risk Europe. He said that with reinsurance rates on the rise, and as insurers pay more for such protection, this cost will continue to filter through to the primary market. Mr Le Dréau noted that other losses, such as fire and mechanical breakdown, are also quite high in Europe and the US, adding to pressure on property insurers. “So it is not only the nat cat events that are demanding change. Terms and conditions today are too low to manage the size of losses, and this has been accentuated by the big storms of 2017. The market was fairly stretched before these nat cats and they have just stretched the market further,” he said. Matthieu Caillat, CEO for France at AXA Corporate Solutions, said the European, and French market specifically, saw a reaction to the major catastrophe losses in the second half of last year at January renewals. “This does not mean that we are seeing increases across the board. It is more specific by line of business. The impact is stronger in property lines and particularly catastrophe exposed accounts which is not surprising,” he told CRE. “We are also seeing a hardening in some niche markets such as marine cargo including static exposure – in particular for the automotive industry. But this is a developing situation and will take some time to become clearer,” said Mr Caillat. Corinne Cipière, CEO of Allianz Global Corporate & Specialty (AGCS) France, also noted rate increases beyond the US and into Europe. For example, while the movement was not as strong as the US, there were rises in France for property accounts severely impacted by 2017’s loss events and accounts extremely exposed to nat cats. “This was on a case-by-case basis and dependent on loss history and so forth. We have seen property rate increases of 10% up to even 30% sometimes for companies with heavy losses. This is also the case on cover where we were not leading. To a certain extent, engineering and construction, after having continuously faced rate decreasing trend for several years, saw stabilisation and some signs of slight increases because of the impact of nat cat events,” she said. When it comes to other lines of business, including liability, the French market did not harden but neither did rates continue to soften, according to AGCS. “In these other lines the market was pretty flat and stable, rather than softening. That said, you can still see some pockets of high competition in those other lines. So there is no overall pattern and it is a bit patchy, and more responsive to risks than previously,” said Ms Cipière. For the first time in half a decade, reinsurance costs increased at the January renewals, but buyers will be pleased to hear that competition kept average rate increases to low single figures, according to brokers. In Europe, the pricing environment was flat, bringing an end to softening conditions. Many market observers suspect the hardening reinsurance market, and hopefully for readers of CRE therefore the primary market, will not be sustained over the long term. Overall, reinsurance price increases fell below early market expectation, according to JLT Re. “Clearly the 2018 renewal season will for many reinsurers be a disappointment in terms of the rating levels achieved,” said James Kent, global CEO of Willis Re. Willis Re said the average increase in global property catastrophe reinsurance pricing at the January renewal was just 0% to 7.5%. JLT Re’s Risk-Adjusted Global Property-Catastrophe Reinsurance Rate-on-Line Index rose by 4.8%. According to Willis Re, reinsurance rates in Europe at the January renewal were flat, ending a period of market softening. Most markets were unchanged, although rates in the UK were flat to 5% increases. While some reinsurers sought significant increases in France, the consensus was flat to a 4% rise. Reinsurance broker Aon Benfield echoed statements from brokers and rating agencies when it said that recent increases in reinsurance rates are likely to be “shortlived”, with strong competition and new capital entering the sector. SCOR CEO, Denis Kessler, told CRE that he expects further reinsurance price increases ahead during the US renewals in June and July, but that a prolonged hard cycle is unlikely. “There is no denying that we now live in a different – less sticky or more fungible – world. What we have now is a succession of ‘spot’ market equilibria, rather than the traditional alternate cycles. There are a number of reasons for this: the transition to a more continuous and ‘real-time’ market; the greater stability of financial conditions with the quantitative easing monetary policies and the disappearance of interest rate cycles; lower barriers to entry; and, finally, the greater ‘fungibility’ of capital. In short, the reinsurance cycle may well be an endangered species,” he said.

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