Insurance market weathers 2017 losses but clouds remain on the horizon

European corporate risk and insurance managers will be relieved by evidence from international insurer and reinsurer 2017 results and renewals reports. While Hurricanes Harvey, Irma and Maria have halted the seemingly endless softening of insurance and reinsurance rates, or at least reduced price declines, they have not yet led to a dramatic hardening as seen after previous catastrophic losses in 2001 and 2005. However, insurers are predicting that the market may correct further in their favour as we move forward. The big insurers and reinsurers all reported significant catastrophe losses last year, accompanied by decent premium volume figures and some rate increases. But the rate rises are not catastrophic for insurance and reinsurance managers, and appetite for risk transfer business remains high among both the traditional risk transfer and capital markets. The big insurers that have already reported numbers are optimistically talking about a more sustained market correction as 2018 progresses. But the news from Zurich was highly positive for corporate risk and insurance managers. The insurer reported average rate increases for P&C business in Europe over 2017 of a mere 2% and has a ‘stable’ outlook for this year. Zurich reported a fall in volumes last year as it continued the restructuring of its commercial and large corporate business under the leadership of Mario Greco but, crucially, limited reserve release rather than another big reserve addition. This is positive news for insurance managers because another potential cause of a dramatic hardening, beside large catastrophe losses, would be massive reserve additions across the industry as seen in 2002 to 2005. There is always the potential for further reserve strengthening requirements, but it currently looks like the big insurers may not be in as bad a position as some had feared when Zurich, AIG and, to a lesser extent, Allianz, announced the need for big reserve additions in recent years. AIG reported much improved figures for 2017 despite big catastrophe losses and an unusually large tax bill related to the new US Tax Act. Its underlying performance was better and the negative contribution of prior year reserve development much lower than 2016, accounting for 4% of the combined ratio rather than 18.5%. Based on this evidence, the big changes in top management at both Zurich and AIG appear to be working. Chubb: ‘Quite optimistic’ Evan Greenberg, CEO at Chubb, said he was “quite optimistic” about market conditions for insurers when he announced group 2017 results. But he was not shouting about double-digit increases. According to results-reporting service Seeking Alpha, during his analyst call Mr Greenberg said: “The strong economy both domestic and global and with an improving pricing environment makes us quite optimistic about our growth prospects for the year ahead.” Mr Greenberg is confident that market firming will continue as the year progresses, but said it will be patchy rather than an overall market-wide, knee-jerk reaction as we have seen in the past. “On our third-quarter call, I reported that we began to see signs of a bit more stable pricing environment for the business we wrote. In the fourth quarter, that positive rate movement continued and in fact accelerated month by month as the quarter progressed, with prices beginning to firm in a number of important classes, both property and casualty related. And that trend has continued into January. 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,” said Mr Greenberg. He said the change in price achieved for both major accounts and excess and specialty wholesale was the best the insurer had seen in a number of years. XL Catlin: Start of slow turn Speaking before news broke of AXA’s takeover of XL Group, Mike McGavick, CEO of XL Catlin, said his firm had seen improving market conditions of about 3.5% rate gain in insurance and about 5% reinsurance at January renewals, with loss-affected accounts seeing double-digit strengthening. Mr McGavick stressed that it is early days and he is hopeful that the first quarter of 2018 will show the positive trend continuing. He agreed with Mr Greenberg that this firming is, however, line-specific and not a market-wide correction. “We’ve only seen the January renewals, which are important, but don’t fully reflect current conditions. For example, there were multiyear contracts in place that haven’t yet been touched and renewals which occurred early in Q4 before storm effects were fully known. There’s still a lot of premium to come, including the bulk of the loss-affected accounts, which will give us more information and more opportunities,” Mr McGavick said in his analyst call, according to Seeking Alpha. “We believe this is the start of the slow turn; while each line will react differently, the aggregate should continue to point toward more consistent and more sustainable rate levels.” added Mr McGavick. Gregory Hendrick, president of property and casualty at XL, said loss-impacted property business saw the highest primary increases, of more than 15%, at January renewals, 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. News from the other leading international insurers did not seriously buck the trend. It appears the big international insurers are fairly confident of a firmer market in 2018 in certain lines and certainly in loss-affected accounts. But this market does not look anything like a 2001 or 2005-style bloodbath, with risk and insurance managers left quaking in their boots as they work out how they are going to explain the massive hike in insurance costs to their CFOs. Bigger picture less certain It is worth asking what could materially change this outlook? Europe’s risk managers would be wise to keep a close eye on what is a developing situation, quarter by quarter. There appear five potential triggers for a more serious, market-wide primary market correction: A dramatic hardening in reinsurance rates Further rapid consolidation Significant changes to regulation and tax More big losses The broader accelerating impact of digitalisation, corporate restructuring and potential shift in focus away from traditional P&C insurance and reinsurance. Reinsurance market Evidence from year-end renewal statements and full-year 2017 results published by reinsurers shows that reinsurance prices are rising but, as with primary insurers, these results do not suggest a dramatically harder market in 2018. The reinsurance market, including capital market investors, has suffered massive losses from Harvey, Irma and Maria, but appears to have been relatively well contained and the resulting rate increases have been limited. Consolidation Further consolidation in the insurance and reinsurance market could theoretically trigger a tightening of capacity and force rates up. There is already a limited number of truly global insurers that can genuinely lead and service global programmes. More deals such as AXA’s planned acquisition of XL Catlin, ACE’s acquisition of Chubb and Sompo’s acquisition of Endurance could prove to be bad news for insurance managers. But the evidence so far is that these deals have not forced a firming or significant reduction in capacity. Indeed, the flipside argument is that such deals are actually good news for risk managers because they create insurers that can truly service their needs. However, deals as large as AXA’s takeover of XL Catlin could alter market dynamics, and readers of Commercial Risk Europe will need to keep a close eye on events. Structural change Another big question is how attractive the larger commercial and corporate insurance segment remains for big insurers in the new world of risk-based solvency regulation, ever more challenging fiscal rules, local protectionism and, of course, digitalisation. Higher capital charges for high risk business, plus higher cost of compliance, makes the business less attractive. If this is combined with ever stricter fiscal rules on the export of premiums for international business – not least from the US – it may become a difficult business in which to make a decent profit, especially when moderate investment returns are on offer. Mario Greco of Zurich, for example, was very keen to talk about the exciting opportunities for growth in retail markets such as health and motor, driven by new technologies. There is investment in new technology to help make the corporate and industrial insurance market more efficient, not least in blockchain. But talk from the big European and international insurers such as Allianz, AXA, Zurich and Generali is mainly of investment in retail-based technologies, while the commercial and industrial operations are ordered to remain disciplined and profit-focused. If this trend continues, and is combined with interest rate rises and a final reduction in the glut of reinsurance capacity, European risk and insurance managers could find themselves facing a rapidly shrinking range of options and firmer pricing as the big insurers focus on ‘easier’ profits in lower cost retail markets. Conclusion European risk and insurance managers would be well advised to watch developments in the insurance and reinsurance space carefully, because market conditions can change rapidly and be sparked by events from unexpected quarters. But for now, the European risk and insurance management community can rest relatively easy in the knowledge that the industrial carrier market is in pretty good shape and competition for business remains intense. The market has reacted to losses and this will probably continue as the year progresses. But it looks like 2018 will be another comfortable year for buyers of commercial and corporate insurance, unless they have suffered losses from these events. This means that they can focus their efforts on more important matters than price, such as service, claims and making sure their global programmes are compliant.

Insurance market weathers 2017 losses but clouds remain on the horizon

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