While there are always a number of wild cards in play, it couldbe said that performance in the Property & Casualty insurancemarket in 2015 will depend greatly on two things: the impact of newcapacity on rate pricing, and whether or not Mother Nature'srelative streak of kindness will last.

With few natural catastrophes of any great significance againthis year, property rates in particular will see declines.(Editor's Note: At the time of this writing, claims figures forthe historic Buffalo snowstorm have yet to be tallied.) Ratesin property have been falling for several consecutive periods, inpart as a result of low loss numbers; Swiss Re reports thatworldwide property losses totaled $21 billion for the first sixmonths of 2014, compared with $25 billion during the same period in2013. This trend is expected to continue.

Lower-than-usual catastrophe losses have contributed to overallsoftening conditions in the P&C market, and as long as thatremains the case—and capital remains abundant, which isexpected—soft-market conditions should remain the norm in the yearto come. Insurers have been lowering rates for P&C coverage onmost accounts as global insured cat losses continue to hover belowthe 10-year average, and reinsurance grows ever cheaper, thanks tocompetition spurred by the influx of an estimated $20 billion inalternative capital that has poured into the reinsurancemarket.

“For this year, continued increase of capital and the depressionof rates caused us to look at new ways of competitively marketingand underwriting our business,” says Bernd Heinze, executivedirector of the American Association of Managing General Agents(AAMGA).

“In the large risk space, the capacity available, mixed with theabsence of U.S. catastrophic incidents, has led to rate decreasesfor many insureds beginning early in 2014,” says Rob Stein, chiefbroking officer of U.S. retail operations at Aon Risk Solutions.“It will be interesting to see, after having already gone oncethrough a full market cycle, the reaction of the underwritingcommunity towards continuing the current trending of renewal priceand terms.”

Net income among P&C insurers rose 6.4% in2014's first half, to $26 billion, according to data fromthe Insurance Services Office and the Property CasualtyInsurers Association of America. Net written premiums rose4.0% to $246.4 billion. Underwriting profitability slippedslightly, with a combined ratio of 98.9% (up from 98.0%) by Q2.

While reduced pricing will help in attracting new business,others in the industry who would much rather see a hardening markethave but one hope for a swing: a major catastrophic loss. Yet withpolicyholders' surplus at $700 billion, losses would have to top atleast $70 billion to really move the needle on pricing, accordingto analysis by property catastrophe wholesale intermediary NAPCO.Zurich General Insurance CEO Michael Kerner was quoted in August assaying that even a $100 billion disaster would be absorbable by theindustry, given the growing market for cat bonds.

While that is a matter of debate, and many a carrier wouldsurely rather not see that theory tested, it is likely thatgenerally softening conditions will remain the “new normal” for thetime being.

“What is interesting to witness regarding the capacity in themarketplace, particularly that driven by alternative capital, isthe potential for 'scope creep,'” adds Stein. “What's meant by thatis, new entrants once lured in to the market predominantly by largerisk, catastrophic property exposure, have begun to move stealthilyinto other lines of coverage. One example is Workers' Compensationand its associated services, including claims management. Thismigration is likely to continue and expand beyond just variouslines of business but into different market segments as well.”

LINES TO WATCH

By now it may seem like we've been talking about Cyber coveragefor perhaps as long as any of us can remember, but the fact is,it's a hotter line than ever—for large businesses, in any case.Each week brings news of another high-profile case of data theft orsecurity breach at major retailers across the U.S.; at the time ofthis writing, J.P. Morgan Chase, Dairy Queen, Home Depot and eventhe U.S. Postal Service were the latest to make headlines for having their customers'information compromised. It seems likely that more corporationswill be affected before the holiday season is over.

Still, Cyber remains a tough sell for many midsize and smallbusinesses, partly for cost reasons—a florist that's just trying tomake payroll would be hard-pressed to spend money on a cyberpolicy—and partly because many business owners don't have a firmgrasp of the exposures involved. Many middle-market contractors,distributors and manufacturers lack a sense of urgency when itcomes to a potential breach of customer data.

“It's hard for them to comprehend the scope of loss,” says WallyBryce, Arthur J. Gallagher's strategic planning leader for itsretail P&C brokerage operations in the U.S., adding thatmiddle-market companies are not as concerned about a breach astheir public brethren. It is hard for potential clients to clearlyunderstand the coverage as well as they would with, say, earthquakecover or even general liability; customers find those covers easierto conceptualize.

Bryce feels that “Cyber” cover is actually misnamed. “It'sreally 'privacy' or 'breach of privacy,'” he says. “It's morewell-positioned to call it that, in the marketplace. From apositioning point of view, the insurance industry may be gettingthat wrong.”

“The Cyber insurance market is experiencing exploding demand,”says Christopher Lang, U.S. placement leader at Marsh. Recentevents in 2014 have highlighted the need for a comprehensiveapproach to Cyber/Privacy risk management, he adds, and coverage isevolving to meet client needs. “Pricing is evolving ascarriers react to a high degree of competition for capacity asmeasured against the ongoing evaluation of the underlyingrisk.”

“Cyber risk is a huge opportunity for the industry; what we dobest is take emerging risk, evaluate it and develop products thatprotect people's balance sheets,” adds Ken Crerar, president of theCouncil of Insurance Agents and Brokers (CIAB). “This is the nextbig risk area we're sorting through.”

Environmental coverage is another line that producers would dowell to keep an eye on. It's worth noting that the frequency ofclaims in this line has continued to rise 20%-30% each year since2009, and these are often not claims of low severity.Specialization is critical in writing this line, and highlypublicized catastrophic claims have led to more regulatory scrutinyon transportation/railroad, mining, energy and pipeline exposures,according to Willis' “Marketplace Realities 2015” report, spurringmany underwriters to re-evaluate the exposures in thesesectors.

Willis forecasts that clients combining Environmental andcasualty coverage could be looking at price increases of as much as25% in 2015, especially those without Sterling loss histories.Exposure class and claim history, the brokerage notes, are theprimary rate drivers in Environmental.

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As it has been for several years, Workers' Compensation willremain a line to which the industry must pay heed, although thestate of that line is anecdotally better than in recent years.According to Willis, overall combined ratios for WC carriersappeared to show continued improvement in 2014.

“It's better, but cautiously better,” says Bryce. The Californiamarket, the largest in the country for Workers' Comp claims andcosts, “affects everyone's thinking about the comp market ingeneral. You can't ignore that.” Still, rate increases in theGolden State are at their lowest levels in years, Willis notes, and15 states have applied for rate reductions.

“It's probably the line that people will talk about next year,and the year after, and the year after that,” he adds.

In Excess & Surplus lines, even with overall growth themarket is seeing some trends toward rate moderation.

A.M. Best's annual special report on E&S lines noted thatthe 14 states with stamping offices continue to report growth inthe first six months of 2014. Interestingly, the 2014 stampingoffices data suggests the number of items filed in the first sixmonths of 2014 is up 9.5% with premium up 4.8%, which suggests somerate moderation with premium growing slower than the number ofitems filed, notes NAPSLO Executive Director Brady Kelley.

“We find the experience in the stamping office states to befairly representative of the U.S. market overall,” he adds. “Wehope to see continued top-line growth in surplus lines insurancepremium in 2015. As the economy improves and new complex risks andinsurance exposures emerge, we anticipate further demand forinnovative insurance solutions from the surplus lines market.”

The implementation of the Nonadmitted and Reinsurance Reform Actcontinues to improve the compliance process for the surplus linesindustry. By isolating the regulation and taxation of surplus linestransactions to one state, the home state of the insured, NAPSLOmembers report a more efficient operating environment in a numberof states.

DIGITAL TOOLS' EXPANDING ROLE

“This will go down as the year of continued expansion oftechnology into everything we do,” says Patricia A. Borowski,senior vice president, industry affairs for the NationalAssociation of Professional Insurance Agents. To the great benefitof independent agencies, she adds, the doors on all forms of socialmedia have been torn off, “and this new method of communication isfast becoming a part of every insurance operation. This changeis so fast and significant that independent insurance agencies andcarriers—even those with the most resources—struggle to keep pacewith these trends, while trying to keep them integrated into theircurrent systems and looking for real ROI.”

Borowski maintains that 2015 will be the year when the next bigupgrade shift in insurance technology will begin. For their ownbusiness reasons, independent agencies will continue to evolve withnew technology, as well as new ways of operating and marketingthemselves. “Apart from what carriers are trying to figure out,independent agency owners know that they must more broadly adoptthe options technology has to offer them and all the ways in whichthey do business,” she adds. “They have a good sense of thedirection they must go to continue being successful; they areasking the right questions and working out their answers.”

Consumers, says Bryce, expect a digital experience when makingtheir insurance purchases: “People may not necessarily want to talkto a person when they need service, but that has to be an option.The industry will change to accommodate that consumer.”

Direct channels are going to continue to be a tough challenge,he adds. “They're going to grow. We have to follow suit and providean increasingly digital experience, going forward.”

Brian S. Cohen, operating partner for Altamont Capital Partnersin Palo Alto, Calif., believes it's still anyone's game between theindependent-agent system and direct writers, “and the ultimatewinners will be those independent brokers who really embracedigital and all you can do with it,” he says. “The independentbroker is the only individual that can provide the local, trustedadvice that people are looking for, but in a technologicallyefficient way. There are going to be winners and losers. Thosebrokers who basically put their heads in the sand are condemningthemselves, in my view, to a slow death.”

While the value, expertise and service capabilities of brokersand agents can never be diminished, adds Stein, the proliferationof unique marketing-driven identities currently driving productionof personal lines business make it easy to believe a new thinkingaround distribution platforms may soon develop in the smallcommercial arena as well. “Perhaps not next year, but shortly downthe road, successful distribution-focused companies knownpredominantly for their ability to showcase content and/orproducts, such as Amazon and Google, could likely become a part ofthe conversation.”

PRESSING ISSUES FOR PRODUCERS

Two of the biggest issues for independent brokers continue to bemergers and acquisitions, and agency succession and perpetuation.“Many people are sorting through the sustainability of theirbusinesses as they grow, and whether they will remain anindependent organization or link with another broker; there arelots of options,” says Crerar.

Talent acquisition and retention is an issue of particularimportance, and must continue to receive its due attention inkeeping agencies viable. “When you run an organization, yourprimary responsibility is its sustainability,” Crerar says.“Leaders who have been focused on business and not onsustainability are only doing half their job because they're notleaving the business the way they should be.”

The ongoing mergers and acquisitions trend continued in 2014,which reduced the number of insurance enterprises in themarketplace. The unintended result is a concentration on a fewlarge, more centralized players focused on putting more choicesunder a single umbrella rather than specialist organizations, saysHeinze.

“We have been in a period that has been very active” when itcomes to M&A, says James Campbell, principal at ReaganConsulting in Atlanta. A lot of this activity is being drivenby—you guessed it—private equity. “There is more private equitylooking to invest or actively invest in the industry than we haveseen before,” he says. “Private equity buyers have gone from amarginal player to the most active buying group in theindustry.”

This tremendous demand from private equity has driven up bothvaluation deals and overall M&A activity. “This will besomething that's interesting to watch,” Campbell adds. Privateequity firms, he explains, are attracted to the basic economics ofthis industry: “interest rates are low, they like the performancetrending, and value growth trending has been positive in theindustry.”

In the wholesale space, Heinze says 2015 will see firms gaininga better understanding of emerging risk and analytics onunderwriting and how to handle claims when they arise—somethingthat's already happening on the Ebola front. “Just in the lastweek, we've seen big changes in how to handle a patient regardingtesting,” he notes. “We're getting a better understanding of therisk. Insurance has always looked at what lies further ahead thanwhat we see now, but now we need to be able to see not just aheadof the curve, but around it, using the best processes we have toanalyze what's currently taking place and how it will affect newthings.

“We are living in an age of insurance that is totally differentthan it was even 10 years ago—how it's underwritten, marketed,sold, priced, all has changed dramatically,” he adds. “That's whywe need more creative solutions rather than the way it's alwaysbeen done.”

With additional reporting by Laura Toops & MelissaHillebrand