Risk transfer market says primary rate rises on the way

As insurers and reinsurers predict rates rises in the primary market, a leading broker doesn’t believe there will be a market-wide hardening in Europe but does expect focused adjustments.

Hamish Roberts, director of business development at broker JLT Specialty, said: “From a European perspective, I don’t think there will be an arbitrary cross-peril, cross-class adjustment made by reinsurers. It will be more focused, with reinsurers picking on parts of their portfolio where adjustment is warranted, starting with cat rates.”

“Insurers will respond in a similar way, pruning out unprofitable business and looking more closely at areas of unprofitable coverage ‘thrown in’ for clients, withdrawing certain problematic coverages. It’s an opportunity for insurers to tidy up their portfolio and have net profitability,” he told Commercial Risk Europe.

However, Mr Roberts doesn’t think there is any need for clients to panic. “This doesn’t look like a 9/11-type market correction. In fact, it can be a good opportunity for clients to refocus on those insurers that understand their business best and get greater clarity on what they are buying in the market,” he said.

Thanks largely to Hurricanes Harvey, Irma and Maria, plus earthquakes in Mexico, 2017 will be only the third year on record in which global insured catastrophe losses have exceeded $100bn. There remains a lot of conjecture about the likely effect of the losses and how they will eventually be passed down from reinsurer to insurer and underlying insureds. But the risk transfer market is talking up rate increases.

AIG is seeking double-digit property rate increases and lower limits, on the back of its $1.7bn Q3 loss owing to $3bn in losses from Hurricanes Harvey, Irma and Wilma, as well as an $836m reserving charge.

“Third-quarter [catastrophe] events will be a catalyst for property and we are taking actions,” said Peter Zaffino, head of general insurance at AIG. “We have been communicating the need for rate in both cat and non-cat with clients and distribution partners,” he told analysts on a conference call.

“Our goal is to achieve double-digit rate increases on a risk-adjusted basis, which will deliver further improvements in the accident year loss ratio on an adjusted basis,” he said.

The soft market for property insurance has allowed attritional loss ratios to “creep up”, according to Mr Zaffino. “In the third quarter we began to push rate, and that was cat and non-cat exposed business, and the rates are holding,” he said.

According to AIG’s chief executive officer, Brian Duperreault, the insurer is not alone in seeking rate increases.

“The severity of recent catastrophic events forced AIG and all market participants to reassess the appropriate pricing of the risks assumed. We have successfully begun to raise rates in the wake of the catastrophes and will continue to do so. We have recently seen other participants follow across the market,” Mr Duperreault said.

International insurance group Zurich expects recent catastrophe losses to drive rate increases right across its business, which have otherwise have experienced only flat to decreased pricing in 2017.

In a trading update, Zurich’s chief financial officer George Quinn said: “We expect the third-quarter natural catastrophe events to drive improvements in pricing across our business”.

Willis Towers Watson said rate increases are on the cards for US commercial insurance buyers in 2018, as a direct result of the recent hurricanes.

“For buyers, this may mean the long soft market for commercial property insurance could be over, at least temporarily, and there may be upward pressure on rates in other lines of insurance,” states a report from the broker.

There is growing consensus that insured cat losses will top $100bn, making a market correction inevitable – though the full pricing impact might not be clear until the first or second quarter of next year, Willis Towers Watson warns.

“Rates are forecast to potentially rise 10% to 20% for catastrophe-exposed risks and 20% to 25% for catastrophe-exposed risks with recent losses. Other property insurance buyers can expect flat rates or low single-digit increases, ending what for many buyers have been several consecutive years of annual decreases,” its report notes.

US casualty rates will be flat or increase by small amounts as pressure from the recent catastrophe losses spills over into other lines of business, Willis Towers Watson predicts.

International insurer Hiscox has linked overall price corrections with loss-exposed US property business in its third-quarter interim management statement, stating: “We are seeing increases of between 10% and 50% and sometimes more… In other London market insurance lines, momentum is building ahead of the busy renewal season and reductions are coming to an end.”

Reinsurers are making a concerted effort to persuade insurers to push up rates for corporate insurance buyers.

In a persistently soft market awash with capital, global reinsurers have been struggling to earn their cost of capital. With recent events putting a big dent in earnings, they now feel prices must go up.

Victor Peignet, CEO of Scor Global P&C, is blunt in his assessment of the situation: “Primary insurers know that their business is not profitable enough; the conversations you hear in the market are not simply about property cat but also about casualty, which is to do with increasing attritional loss ratios across the board and higher severity in certain segments, both of which have affected recent underwriting years,” he said. “The recent events have created a catalyst for a general review of where the market is right now.”

Mr Peignet added: “Everyone should pitch not just higher but, even more importantly, tighter on terms and conditions, within reason and without being carried away by overreaction.”

Continued uncertainty about the final loss tally from the recent windstorms is toughening sentiment among reinsurers.

Speaking to journalists in Baden-Baden last month, Munich Re board member Hermann Pohlchristoph said the windstorm losses were proving to be highly complex. “In the case of Maria, there is significant damage to the infrastructure of pharmaceutical companies in Puerto Rico. Puerto Rico represents 25% of the global pharmaceutical industry, so to come up with a reasonable estimate for the business interruption losses, which could be very severe, is hard to do.”

According to current estimates, Munich Re anticipates losses of €2.7bn after retrocession from the three large hurricanes. The reinsurer’s overall major-loss expenditure will amount to €3.2bn in the third quarter.

Swiss Re took a $3.6bn hit from Hurricanes Harvey, Irma and Maria and the Mexican earthquake in the first nine months of 2017, with its Corporate Solutions unit posting a net loss of $762m in the same period. Speaking on a call with analysts, group chief underwriting officer Eddie Schmid said that while property lines are most affected, other direct lines will see upward pricing as well.

“And even on the casualty lines, we would expect improvements, not particularly for the cat losses, but some of the casualty lines – like motor in the US, motor in Europe, US liability – have also not performed well,” Mr Schmid said.

On the same call, Swiss Re’s CFO David Cole said: “In Corporate Solutions and in P&C Re, we are very well positioned to benefit from pricing improvements, which we expect to occur across all lines.”