No end in sight for soft insurance market as cycle bucks trend, says Guy Carp

The soft insurance market looks set for a good while yet as insurers buck previous cycle trends and things continue to look rosy for them and, ultimately, their customers, according to Guy Carpenter. The insurance industry remains an investor “sweetspot”, attracting capital and being highly competitive, said Guy Carp. However, despite the long-running soft market, insurers continue to deliver strong performance and good dividends for investors where previously competition and resultant price wars have led to falling margins, loss of profit and ultimately a reduction in capital, added the broker. Richard Hewitt, head of business intelligence at Guy Carp, feels that the insurance market is likely to remain attractive to investors – which will ultimately prolong soft market conditions enjoyed by buyers – as long as it continues to drive efficiency and focus on capital optimisation in response to current market dynamics. “We are seeing a very different market response to the current competitive phase of the cycle,” said Mr Hewitt. “Previous cycles were classically driven by supply and demand. Amidst harder markets, insurers de-risked portfolios and hiked prices, margins improved, retained earnings grew and excess capital built up. With an increasing appetite for growth, the focus shifted to growing the top line as insurers acquired new customers, cut prices and conditions and pursued mergers and acquisitions. A price war ensued — margins fell, profits collapsed to losses and capital was destroyed. This is not happening this time,” he added. According to Mr Hewitt, there are four key reasons why usual cycle dynamics are not playing out. Firstly, there has been a lack of catastrophe losses. The impact of cat losses on insurers’ core operating ratio has recently dropped from a long-term average of three points to below two points. It remains to be seen whether losses from Hurricanes Irma and Harvey will buck this trend, but initial noises from market observers suggest claims will not be enough to turn the market. A second current market trend is strong reserve releases driven primarily by low inflation and deflation pressures. In addition, increasingly effective cost-efficiency measures are being deployed by insurers and smarter reinsurance buying is occurring, along with better capital optimisation. “We are seeing an improved and hopefully stronger industry emerge,” said Mr Hewitt, who believes there is little sign of current market dynamics changing significantly. “If inflation behaves and insurers continue to push ahead with cost-reduction efforts (given current cost ratios there is still plenty to be done) and investors reward them for high dividends and share buybacks over growth, then I would expect this current phase to continue for a long time. We’re in a ‘Goldilocks’ state – there’s plenty of warm porridge still in the bowl and the bears are nowhere in sight,” he said. Therefore, the insurance market is set to appeal to investors for the foreseeable future, Mr Hewitt continued. “The industry is currently in a sweetspot and there is a lot more it can do to keep this running. Current valuations are still favourable for investors. Dividend growth and capital management actions can continue to drive the sector forward, rather than the returns and growth that might have done so in the past. Insurers today are better positioned with investors than they have been for a very long time,” he said.

No end in sight for soft insurance market as cycle bucks trend, says Guy Carp

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