Renewals: better times ahead?
Primary renewals have been tough in the last few years, with the hard market seeing prices increase dramatically in many cases, and terms and conditions tightening. Things have certainly eased recently in most lines, with the notable exceptions of cyber and natural catastrophes. Tony Dowding reports…
While the hard market has moderated, there are challenges ahead, not least in the reinsurance market which is expected to see a tough January renewal season and prices heading upwards. War in Ukraine, inflation and recessionary pressures globally may all impact the primary insurance market.
Hugo Wegbrans, global head of broking, WTW, says primary renewals are generally in a good place: “We still see some rate increases but nothing to the extent of the last few years. Only in the cases of difficult industries, large natural catastrophe limits and cyber insurance does the market remain tough for insurance buyers. Insurers are looking for growth at current – or slightly higher rates – following good underwriting results over the past eight months.”
But he adds: “There is concern around the uncertainty of quite a few risk elements, such as hurricane Ian, inflation, supply chain issues, social inflation, the overall economic situation and geopolitics. This makes it difficult to give an outlook for where rates are going.”
Commercial pricing
To give some context, global commercial insurance prices increased an average 6% year over year in the third quarter of 2022, down from a 9% increase in Q2, according to Marsh’s Global Insurance Market Index. This continued a trend of moderating increases that began in Q1 2021. David Rahr, global leader, Marsh Multinational, notes that while this is the 20th consecutive quarter of increases, pricing moderated in most regions, driven by the first decrease in financial and professional lines since Q3 2017.
He says pricing increases across most regions moderated due to an overall decrease in certain financial and professional lines, most notably D&O insurance. He points out that the US, with a composite pricing increase of 5% (down from 10% in Q2 of 2022), experienced the largest moderation in average price increases. Rates increased in the UK by 7% (down from 11%), in Pacific by 5% (down from 7%), and in Asia by 2% (down from 3%). In Latin America and the Caribbean prices increased by 5% (the same as Q2), and by 6% in continental Europe (the same as the previous two quarters).
Wegbrans believes competition is increasing but says this is leading to market flattening more than premium reductions. “With all insurers looking for growth at the existing or a slightly increased rate, this might flip into a more stable – or even decreasing – rate environment, especially if premium is going to increase through inflation.”
He adds: “The tightening of conditions is a trend we have not seen changing. There is, however, a more individual risk-based approach with insurers. This means that based on the right underwriting information, insurers are willing to negotiate client-specific coverage items.”
In its latest sigma report, Swiss Re says that looking forward, it believes there will be further rate hardening in non-life insurance, fuelled by high inflation and large losses from both hurricane Ian and the war in Ukraine. “We see commercial lines (including workers compensation) continuing to benefit most from rate hardening and expand more than personal lines (excluding health) in the coming years. We estimate 3.3% growth in commercial premiums in 2022, and a 3.7% gain in 2023,” the report states.
Swiss Re says it anticipates that significant claims inflation in commercial lines of business this year will fuel fresh momentum in rate hardening for the next 12-18 months. It believes that the significant increases in construction costs in many countries, and high and rising natural catastrophe losses following hurricane Ian, will put upward pressure on property lines.
Reinsurance impact
With tough reinsurance renewals expected in January, the question is to what extent will this affect the primary markets. “Especially for natural catastrophe, the reinsurance renewals are tough. It is the effect of pricing those perils to the primary insurance that is expected,” says Wegbrans. “More worrying is the capacity available for natural catastrophe risks. Our advice to risk managers is to have their catastrophe modelling done, so one is aware of what insurance limits need to be placed in the market – both direct risks as well as supply chain.”
David Flandro, head of analytics at Howden, says: “While we are certainly projecting variability of outcome by line of business, it is clear that the risk is to the upside in terms of rate developments, not least in reinsurance, where the market is severely dislocated.”
He says one effect of the expected, elevated reinsurance pricing is “stronger for longer” primary pricing. “Reinsurance obviously isn’t the only thing sustaining price increases. Claims inflation, asset impairments and heightened risk premia are also playing a role. Again, this will vary significantly depending on the line of business,” he adds.
“Capacity is clearly an issue in the reinsurance market, and yes, there are areas of primary and specialty insurance where capacity has contracted significantly, for example in cyber where ransomware has been an issue, or in D&O where litigation financing has created adverse claims development,” says Flandro.
Inflation challenges
Marsh’s Rahr says that during the last year, inflation has been a source of significant challenge for the industry as underwriters look to forecast and measure risk in a changing marketplace. While this is a global dynamic, he believes there are some regions and lines of business under greater underwriting scrutiny.
“In the US and, to some extent, Asia and the UK, valuation is a key focal point for virtually every underwriter, largely due to concerns about the current inflationary environment, supply chain challenges, labour shortages and loss experience where the adjusted loss amounts were well above the reported values,” says Rahr.
“On the casualty side, we’re also seeing insurers carefully monitoring areas related to inflation, court systems reopening, an increased number of vehicles on the road, and recent hurricanes in the US. In the UK, we see inflation related to electric vehicle repair impacting underwriting decisions and pricing. The challenges of ‘social inflation’ on casualty risk have also become a threat to underwriting performance outside of North America, with rising concerns in the UK and parts of Europe,” he says.
Wegbrans thinks the uncertainty around the level and effect of social inflation, storms, conflict, recession, supply chain and geopolitical issues is certainly tempering the pace of market change. “If the outlook of these becomes somewhat clearer, insurers will be moving faster in their strategies. With all growth plans, the focus of insurers remains on returning a profit on their core business, i.e. well below 100% combined ratios,” he says.
There appears to be a growing bifurcated market between good risks and those with poor loss history, or between desirable industries and more challenging ones. Marsh’s Rahr says underwriters will always favour those accounts with favourable risk profiles and a commitment to effective risk management principles. But he stresses that programmes can be priced and structured in a number of ways to address more challenging industries.
“In the US, we’re seeing casualty underwriters express concerns regarding latency risks, such as PFAS/PFOS, the so-called ‘forever chemicals’. While underwriters in continental Europe have signalled concerns for excess casualty risks in the US, related to increasing trends in social inflation. We’ve seen an interesting trend in Asia with some insurers taking a stronger position on their ESG requirements related to casualty placements, by reducing or withdrawing their support based on the strength of a client’s commitment and practices,” he says.
He says the last two years have generated a number of new risks and future concerns, all of which are being factored into the underwriting processes across regions and countries. “The global business environment remains tough for clients. Ongoing inflation and geopolitical instability are affecting all sectors, and we expect even more challenging conditions in the already strained property catastrophe market following hurricane Ian,” he adds.
Wegbrans says there is more selection of the risks by insurers. “Bifurcation will be around the well-managed risks and the ones that are not having the right attention for risk management. Losses can always happen, the market is getting more difficult for the companies that are not dealing with risk issues, which might have caused the loss, in the right way,” he explains.
Insurers’ viewpoint
Insurers believe the upcoming renewal season is likely to be disciplined, with challenges ahead for the P&C market. Speaking to Global Risk Manager at the Ferma Forum in October, Penny Seach, Zurich Insurance’s chief underwriting officer (CUO) for EMEA, said: “Broadly, we expect the renewal season to be a disciplined one. Rates have been increasing but there still isn’t a huge amount of margin. With geopolitical pressures, economic inflation, demand surge inflation and regulatory changes, it is still going to be challenging ahead in the property market.”
In particular, she said all indications are that tightening capacity for cat-exposed property risk will lead to a challenging 1 January renewal. “We’ve seen capacity exit out of the cat market and reinsurers are looking to restrict and pull back, especially where they have areas of high concentration,” said the CUO. Property programmes that are not heavily cat-exposed will probably be a bit more stable, she added.
Seach also said inflation will mean risk managers need to concentrate on insured values at coming renewals. “It is important for us that we understand and anticipate the impact of economic inflation – we are watching this closely to make sure that we are getting the right declared values coming through,” she said.
Seach said the liability market is also concerning Zurich. “There has been a lot of social inflation coming out of the US – the awards are eye-watering in some cases – together with a lot of regulatory changes on the horizon across Europe, more litigation funding etc. Our concern is around how the liability market will shape up in the longer term,” she explained.
Also at the Ferma Forum, Fred Kleiterp, CEO EMEA at Swiss Re Corporate Solutions, told GRM: “We have had a couple of years behind us where rate increases were very steep, and in certain lines ,extremely steep, but now pricing is moderating, so less extreme price increases are expected. In certain lines you could even see that things are becoming a little bit more relaxed in a way like financial lines for instance.”
He added: “But obviously we are living in a very complicated world and the risk landscape has intensified further, not necessarily with risks that are completely new to us but they are much more present and they’re all coming at the same time. We see the effects of climate change – we had floods last year and droughts this year. I think that’s one element that is changing the risk landscape and which needs to be modelled through and priced correctly going forward.”
Regional differences
Of course, there are many market differences and the pace of change is always different from region to region, and even from country to country. Wegbrans says local market circumstances and historical changes to rate and product will have an effect on the level of change, but he adds that all markets seem to move in the same direction from a macro point of view.
Howden’s Flandro says there are regional differences globally, “as there always are, but this market is materially different from that of a few years ago”, adding: “While risk capital is fungible, it is not fungible in the tail. Given asset-side impairments, inflation, war and higher interest rates, we are closer to the tail!”