Risk managers best beware of market in transition says Amrae study

The study by the French risk management association also highlights noticeable exceptions to the stable market in areas such as motor where prices are rising significantly.

“The market is stable, but we are in the end of a cycle,” said Catherine Pissel, the author of the Amrae market study and Deputy Risk Manager at Veolia Propreté.

The trend is still for prices to go down in most lines, but insurers are being increasingly vigilant over buyers’ loss history, she added. “Therefore, in the next renewals, rate increases could be significant, even if some decreases are expected depending on the capacity,” she said.

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The study indicates that insurance buyers must keep their eyes open and be prepared for a market that is clearly fluid, she stressed. “I would tell risk managers to remain attentive. We are living in a transition period and we don’t know yet what direction the market will take,” Ms Pissel warned.

An important factor in the market is the accumulation of losses caused by natural catastrophes in recent months, which have been putting the reinsurance industry under growing pressure.

But Ms Pissel said that the situation is not even close to that of 2005, when a spate of events headlined by hurricane Katrina in the US caused major commotion in the reinsurance market.

All in all, the reinsurance market remains well-capitalised. But Amrae believes that the lack of significant investment returns, due to turmoil in global financial markets, is forcing insurers and reinsurers to pay closer attention to technical results.

One of the consequences is that self-insurance strategies are likely to look more attractive for companies with large exposure in areas like property damage.

“Captives should come back into fashion,” Ms Pissel said. “Because of natural catastrophes, insurers anticipate a harder market and they are likely to revise their policies, in particular concerning excesses. They may possibly define excesses as a ratio of the amounts to be insured.”

She added that: “In recent years, there was no real financial advantage to be taken from self-insurance arrangements via captives. The situation is changing now, there will be an advantage to transfer risks via captives rather than the market.”

The future of captives is a widespread concern for risk managers, however, as the forthcoming Solvency II directive risks imposing tough capital rules on such vehicles that could reduce their economic viability for many firms.

One insurance sector that worries French risk managers is motor insurance. Prices are clearly on the up, Ms Pissel noted. “In France, we have seen bad statistics that are affecting motor insurance. There have been many more traffic violations, and more accidents too,” she said. “Costs related to physical injuries are rising too, because compensation limits are going up for legal reasons. And natural catastrophes have caused plenty of car-related losses. It all combined means that motor insurers have had a tough time and some have even withdrawn from the market. So we have less competition, lower capacity and a perspective of higher losses.”

As a results of the pressure they are under insurers are becoming more selective of the risks they transfer. “Companies are likely to focus on technical results and become more selective with the risks they underwrite. We have seen some insurers refuse to take some risks related to fleets for the transportation of people or merchandise,” Ms Pissel remarked.

“The market is reconfiguring itself and we are set to see some considerable rate hikes, sometimes of up to 50%.”

One of the sectors where buyers should still find themselves with the upper hand in most cases is civil liability. This is thanks to a ferocious level of competition and comfortable availability of capital. “Prices are likely to go down, with the exception of some specific cases. Activities like pharmacy, oil and gas are examples where it is difficult to buy insurance today and it does not look like the situation will change for them,” Ms Pissel said.