Prices are holding steady for corporate buyers of casualty insurance products, and in cases where the loss experience has been particularly good the premiums have fallen. On the property insurance side of the industry, it’s a buyer’s market, with prices falling at a quick clip. And in both industry houses, insurers eager to maintain market share are open to altering policy coverage terms and conditions.
These are just some of the enticing tidbits risk managers can anticipate as they head into the annual April policy renewal season. While not all companies renew their policies in the springtime, most do. Unlike past market encounters, this go-round promises good deals along with the sunshine and flowers.
Many carriers, for instance, are open to writing casualty primary and excess lines of coverage in occurrence-based policies instead of less favorable claims-made formats. Additionally, multi-year transactions are available in property, new sources of private flood insurance capacity have opened up, and even terrorism-related coverage in many policies are there for the taking at little to no cost.
The future bodes even better, with 92 percent of insurance company CEOs in a survey by PwC expressing confidence that their revenues will increase over the next three years, provided not by increasing premiums but through technological advances, particularly the impact of data analytics on underwriting.
Good Deals Galore
All in all, it’s not only a good time to be a risk manager, it’s about time, too. Four years ago in Treasury & Risk magazine, an article on risk managers began—“They’re frightened, they’re angry and they’re sleepless.” The title of the article was instructive: “Dreaming of Better Days Ahead.”
Those days appear to have arrived. “The property/casualty market is softening apparently faster than we had predicted in October ” said Matt Keeping, chief placement officer at insurance broker Willis North America. “At that time, we were suggesting that rates in the property, non-catastrophe market would be down 10-12 percent, and the catastrophe market down 5-10 percent. There’s been a bit of a change, with reductions now in the 15-20 percent range for non-catastrophe, and in the 5-20 percent range for catastrophe. Things are accelerating.”
The news is less bullish on the casualty side, but nonetheless upbeat. “We estimate that average rates are tight around the zero mark, with a slight plus or minus,” said Steve Kempsey, US casualty leader at insurance broker Marsh. “Rates essentially stabilized in 2013, although the guaranteed workers compensation line is still difficult. Nevertheless, insurers are more willing than in the past couple years to be flexible. … They’re more apt to negotiate on renewals.”
He notes that a company “in a desirable risk class with a differentiating risk profile can still see a good premium reduction.”
Robert Hartwig, president and chief economist at the New York-based Insurance Information Institute, agrees the market is softening in property, but less so for casualty business. “I’d say prices are holding the line, depending on how aggressive the insurer is to acquire and/or retain business,” Hartwig said. “Nevertheless, this is an improvement over where we were a year ago.”
What accounts for this improving picture? The primary factor is a flood of capacity coming into the reinsurance markets, giving primary insurers more leeway to lay off assumed risks. For example, Everest Re’s special purpose reinsurer, Mt. Logan Re, Ltd., secured additional funding in January bringing its current committed capital to $370 million, well in excess of the initial target of $250 million. The special purpose reinsurance facility was formed last year to provide collateralized capacity to the global property catastrophe reinsurance market.
Such non-traditional reinsurance capacity, in addition to a lack of major US catastrophe losses in 2013, have combined to lower reinsurance rates for primary insurers, which is now trickling down to soften commercial pricing. “Everyone benefits when you’ve got a record level of reinsurance capacity, which is the case right now,” said Keeping. “And the spigot remains open.” Additional sources of non-traditional capacity are flowing in from private equity, hedge funds and pension funds, he explains.
This non-traditional capacity also is evident in the development of catastrophe bonds to further absorb property risk. “All this alternative capacity is a new dynamic in the reinsurance market,” says Hartwig. “Combined with low catastrophe losses, it puts downward pressure on pricing, expanding what reinsurers are willing to do—where they put their capital to work.”
Other factors influencing the softer market include the improving economy and rising investment income yields, although the observers discount both. “The economy is certainly helping, but no one would have a parade over how well it is doing,” Keeping says. “And investment income just isn’t playing as much of a role as in previous insurance cycles. The focus instead is on growing profits through improved underwriting data and actuarial analyses.”
Kempsey shares this view. “More clients are using data analytics and not just on the property side,” he said. “Our global analytics team has developed a cutting edge tool for risk financing optimization that helps companies structure insurance programs in the most economically efficient manner, while meeting the organization’s risk tolerance goals.” He adds that the tool can tell companies if their financial limits of protection are appropriate, too high or too low.
Aside from generally favorable pricing conditions, the property/casualty market has also liberalized coverage terms and conditions for some classes and lines of business. “In 2013, the property market was experiencing a bit of a hangover from Superstorm Sandy, and some insurers were tightening up their manuscript policy forms, creating issues over incurred losses,” Keeping said.
He’s referring to the inability of some risk mangers to reinstate the financial limits on their property insurance policies once the limits were exhausted or eroded by Sandy-incurred losses. Although the policies remained in force until expiration, some carriers were unwilling to extend additional limits of protection. And at policy renewal, several insurers offered new limits that were well below previous levels of insurance. “This is much less of a concern today, but buyers nonetheless need to work closely with their brokers to ensure optimum treatment,” Keeping said.
Hartwig agrees, citing several examples where coverage terms and conditions are broadening. “We’re seeing more occurrence-based policies being written, more private market willingness to write flood insurance, and even terrorism insurance being provided at minimal cost in many policies,” he said. “There’s even talk from some carriers about putting up capacity for standalone terrorism coverages.”
Among these product enhancements include a new excess liability policy form put together by Marsh to minimize the oft-conflicting terms and conditions found in carriers’ excess policies. “When companies buy layers of insurance, they assume they all follow form—they don’t always,” Keeping said. “Sometimes the terms and conditions are different on a layer-by-layer basis, which can create holes in the program. The new form addresses these inconsistencies.”
Dave Hennes, risk manager at The Toro Company, a Bloomington-based maker of turf, landscape and irrigation equipment with $2 billion in 2013 revenues, exemplifies much of what awaits risk managers in the April renewal season. In his last renewal, he was able to move the rest of the company’s excess casualty insurance from claims-made to occurrence coverage, saw improved pricing on most lines of insurance, and was able to ink a two-year property insurance policy to boot.
“We had good results from a loss standpoint, which helped us, but what we’re hearing is that the markets are softening due to carriers’ favorable reinsurance renewals,” the veteran risk manager said.
With regard to his next renewal, Hennes is upbeat: “I’m reasonably confident the good news will hold.”