Market to harden into 2021 as concern mounts over pace of change

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Experts predict that commercial insurance market hardening is set to continue through January 1 renewals and well into 2021 as carriers attempt to balance Covid-19 and other loss costs.

The commercial insurance market has been hardening in some areas since the beginning of 2018 and across every major region for the last seven quarters, according to Marsh. Its Q2 2020 Global Insurance Market Index saw the biggest year-on-year increases, of 19%, since it was launched in 2012. This follows a rise of 14% and 11% in the preceding two quarters.

Aon’s second-quarter update said rates continue to harden across the global insurance market, with average rises between 11% and 30%. It warned that the gap between supply and demand in the EMEA region is increasingly working against buyers.

With insurers reporting growing price increases in their latest results, it seems the bad news for buyers is that market hardening is accelerating. And experts have told Commercial Risk Europe they expect the hardening to continue through the rest of 2020, 1 January 2021 renewals and into next year.

Hugo Wegbrans, Aon’s global chief broking officer, said that under “normal” circumstances, pricing is getting to a heathy level for carriers where you would expect to see rate stabilisation and then a reduction.

But, given the long-term loss trends in some lines, the impact of Covid-19 and a potentially heavy nat cat season, he thinks buyers are “going to have to wait well over a year to see that stabilisation this time around”.

Nick Holmes, head of global placement – continental Europe, Middle East and Africa at Marsh, said it is “clear the challenging market is here to stay, at least into the early part of 2021”.

“Increased losses, not only Covid related, but natural catastrophe related, are likely to put further pressure on rates. However, new capital is entering the market, bringing competition and in some sectors a slowdown in rising rates,” he said. Ratings agencies also expect the insurance market to continue hardening for the foreseeable future.

Jennifer Marshall, director at AM Best, told CRE her firm expects market conditions to remain firm in most commercial lines. “Insurers seem to be strategic and focused in terms of which lines and accounts to drive rate, and we anticipate the upward momentum will continue into 2021 based on what we’re hearing from our rated insurers,” she added.

According to Ms Marshall, uncertainty around the impact of Covid-19 on coverages and exposure will drive caution among insurers. In addition, the expectation that interest rates will remain lower for even longer will increase the need for insurers to maintain or improve underwriting profitability to support overall returns as investment portfolios struggle, she explained.

Her colleague, Michael Lagomarsino, a senior director at AM Best, agreed that the commercial market is set to harden through 2020 and into 2021, given uncertainty over loss costs and increasing pressure from rising reinsurance prices.

And the pressure from reinsurance won’t dissipate anytime soon, according to Robert Mazzuoli, a director in Fitch’s insurance team.

“We believe the reinsurance industry has entered into a hard market phase, with June/July renewals a clear testament of this. We expect the hard market to continue to at least the January 2021 renewals,” he told CRE.

And there is mounting concern over the pace and scale of insurance market hardening among buyers’ representatives.

Ferma president Dirk Wegener told Commercial Risk Europe that insurers were already arguing that commercial insurance was underpriced before Covid-19. But he warned buyers that the market is “tougher” since the pandemic struck as insurers measure the impact of losses and changes in asset values.

“Insurers are looking for overall increases in premium rates, as well as exclusions or limits to where they feel coverage included in previous contracts was underpriced. This is a real concern for risk managers. We’ve seen it with cyber and now with the pandemic,” said Mr Wegener.

Ferma’s president added that given the enormous costs pressure most companies face as a result of the economic downturn, or which has been accelerated by Covid-19, he would “not be surprised if the level of insurance purchase goes down or is reduced”.

“This is not only because the insurers are offering lower limits and demanding more exclusions, but also because insurance managers have to control their budgets,” he added.

Mr Holmes said Marsh is not only concerned about the level of rate increases in certain sectors but the pace at which the market is evolving, particularly for property and D&O insurance. There are also problems with falling limits and capacity for some risks, he continued.

“Currently, increases are generally limited to property, D&O and excess casualty, although there is also some movement in general liability. While these remain the key areas of concern, capacity is still available; albeit carriers are being more selective as to how and where they deploy their capacity and, in many cases, are reducing limits. Our concerns are not only linked to pricing but also reductions in capacity, particularly for clients buying large limits and with US exposures,” he said.

Mr Holmes added that price increases in Europe are generally limited to major industrial clients. But he stressed conditions vary country by country and carrier by carrier, which makes it “increasingly challenging to predict how the market will evolve”.

“In the current economic environment, our greatest concern is the impact on our clients and their ability to secure coverage at acceptable levels or through accessing alternative solutions, to remain covered for their key exposures. It remains important that insureds differentiate their risks in order to secure the best outcome at renewal,” he said.

Aon’s Mr Wegbrans said the “very broad” market hardening is a big concern for insurance buyers and brokers, particularly now there are some capacity shortfalls.

“We see capacity shortages where insurers have decided not to deploy it for certain industries or lines of business. The major ones still being financial lines, D&O and business interruption. But it is also getting tough in P&C, particularly for any big US exposures,” he said.

Mr Lagomarsino said commercial insurers have accelerated rate increases, reduced risk appetite and tightened terms and conditions across a majority of business lines. These include property, commercial auto, D&O, umbrella and excess casualty coverages and general liability, he said.

This trend has only been accelerated by the pandemic. “These trends were occurring even before Covid-19 – driven by lower interest rates, several years of pricing below loss cost trends, social inflation and elevated catastrophe losses. Covid-19 has accelerated macro trends that were already underway,” said Mr Lagomarsino.

Risk managers taking part in our Risk Frontiers Europe survey have also seen the market hardening and fear it will only tighten further.

Swedish risk professionals agreed that insurance prices are on the rise and the pandemic is only likely to fuel the fire. The group also agreed that terms and conditions are changing and capacity shrinking.

“That means insurers that are left are able to charge what they like,” said one risk manager, “Because they know we have no choice but to go with them.”

Leading members of GVNW, the German risk management association, said buyers need to steel themselves for further hardening in an already tough commercial and corporate insurance market.

President Alexander Mahnke said further hardening is inevitable, but is not sure how much higher insurers will be able to push because many clients will simply not be willing or able to pay.