Advisen Front Page News
- Wednesday, October 11, 2017
2017's 'recipe for disaster' set to turn commercial P&C market: CIAB round-up
Advisen
2017's 'recipe for disaster' set to turn commercial P&C market: CIAB round-up
By Rebecca Bole, Advisen
A confluence of weather-related disasters, economic factors and market conditions are likely to drive the commercial P&C market to increase rates next year, according to executives at the CIAB Industry Leader’s Forum (ILF) this week.
A spate of catastrophe events in the US, including hail, fire, convective storms and this season of hurricanes are expected to compound a sustained period of rate reductions across P&C lines of business to create a hardening market in the property sector – and beyond into casualty lines – many executives said.
Advisen canvassed opinion from a number of industry executives on expected market conditions for 2018. The ILF conference was taking place in Colorado Springs, CO, just as Hurricane Nate was making landfall and as news was breaking of the wildfires in Northern California. Please note that in such a dynamic natural catastrophe season, comments on market conditions may appear outdated very quickly. These interviews took place between Monday October 2 and Monday October 9 2017.
Of course, it is too early to confirm actual loss costs from recent natural catastrophes, as many carriers and reinsurers have not yet reported numbers. However, the expected range of insured losses from the events varies from $100 billion to $200 billion, according to various cat modelers.
At the low end of this range, the insurance industry response may be contained within the property market, with insurers suffering a short-term hit to their profit-and-loss (P&L) accounts, rather than significant capital erosion (what many are calling a ‘balance sheet event’).
Brokers, on the whole, believed a hardening market would be contained within the property sector:
Marc Cohen, president of HUB International, said: “The carriers are still forming strategies to deal with their cat exposures and how will they price for it. It’s still early in the game, but at this point we are seeing rates in cat areas increase in the range of 3 to 10 percent. But increases could be more based on the individual dynamics of the risk.”
Mike Pesch, president of US Retail P&C at Arthur J. Gallagher said to expect “some hardening in the micro-geographies” of Houston and South Florida – areas that until recently had not experienced major storms. “We will see underwriting and pricing challenges in those areas, but we can’t say ‘hard market’ at this time,” Pesch told Advisen.
Willis Towers Watson Global Head of P&C, Eric Joost, said the market had so far behaved “in an orderly manner,” which he considered a “real compliment to the industry.” Joost added that although he thought recent hurricanes would be a “P&L event” for the property market, “there’s always a possibility” the repercussions could spill out into the casualty sector as well.
Mike Rice, CEO of JLT Specialty, placed the recent natural catastrophe events into a wider context of rising frequency of D&O and severe cyber losses, noting there was “very little margin for error” in the marketplace. Rice said no one had enough information at the moment to accurately predict natural catastrophe losses, but if losses rose to the higher end of estimates, then he predicted a “capital event” for the industry.
“If you take $100-200 billion of capital out of the market right now, you will see an immediate reaction,” Rice said. He reported carriers “taking a closer look” at loss-exposed sectors. “Flat is the new floor,” he said, while the market waits for the losses to develop and reinsurers to react through the January 1 renewal season.
However, he added it was not all “doom and gloom” for the insurance buyer, as there was still capital waiting to deploy into the insurance sector, helping to moderate rate increases.
Industry legend, Pat Ryan said that with carriers’ reserve releases exhausted, the events of 2017 will likely be a “significant hit to capital.” He noted attendees at this year’s CIAB were “very conscious of the potential impact of dramatic change” in both the risk environment and the insurance market.
“We may look back on 2017 as the year that really signaled significant change in the market – change that will stick,” Ryan said.
Carriers, not surprisingly, were predicting a more severe reaction to current market conditions. Jack Kuhn, CEO of Global Insurance at Sompo International said the market was at a “tipping point”.
“Before these hurricanes, we were starting to see cracks in some company’s foundations, as quarterly earnings reported reserve strengthening, attritional losses, portfolio realignment,” Kuhn told Advisen. “The events of Q3 will accelerate these cracks. This should be a market event, not just s property event,” he said.
Ironshore CEO, Kevin Kelley, said the “story for 2018 will be about the extent of the spill-over of market correction into non-property cat lines of business.”
Kelley said the global P&C insurance sector was not making money, that it was facing expenses challenges and underwriting challenges across multiple lines of business.
“The lack of catastrophes masked problems elsewhere in our industry. We might see a scenario in 2018 where the property losses act to remove the veil from what’s going on in other lines. The market is in a fragile state,” he said.
Tom Lawson, FM Global CEO said he would be “shocked if rates don’t go up” in the property market, as these recent events have “hit an industry that has been unprofitable for several years.”
“Coupled with low investment yields, carriers can’t invest their way out of a bad underwriting year,” Lawson told Advisen.
On a more moderate note, outgoing Zurich CEO Mike Foley said he expected “some carriers” to experience balance sheet pain from 2017, and that although too early to make market predictions, he “expected property rates to firm.”
Russ Johnston, QBE North America CEO made similar comments, saying (at this early stage) he expected 2017 to be an “earnings event” for the property market and that he did not expect rate increases to spill into other sectors. He expected the industry to get an “early read” on the impact of the 2017 loss year in January and a “much stronger sense” by the end of Q1.
Finally, the reinsurers’ helicopter view of the market sees an industry struggling to meet its cost of capital.
Steve Levy, CEO of the reinsurance division at Munich Re America noted the US commercial P&C market just experienced its 11th consecutive quarterly decline in rates.
“This decline in rates, in conjunction with social inflation [a rise in tort cases affecting insurers] and recent catastrophic events, will drive returns substantially below the cost of capital with social inflation likely to have more of a long-term effect,” Levy said. “This situation is just not sustainable even given the industry’s strong capital position. At this point, it is difficult to judge the impact in other sectors. However, if the high end of the current estimated losses for these events becomes a reality, it could affect the capital position and capacity of many industry segments beyond property.”
Swiss Re President of US P&C, Keith Wolfe, told Advisen that he did not see “many bright spots” for P&C at the moment. “Arguably, the bright spot was the property business, as it was propping up other poorly-performing lines, such as the auto portfolio. But that is no longer the case,” Wolfe said.
“Many carriers are struggling to make appropriate returns for their balance sheet commitments,” but Wolfe had confidence that the insurance industry has adequate talent to “figure out how to right this ship” in the coming months.