The story for the insurance industry in 2015 andheading into 2016 is one of highcapacity, competition and softening rates.

Marsh’s “United States Insurance Market Report 2016” notes thistrend across the Property, Casualty and reinsurance sectors, and experts atMarsh and Guy Carpenter indicate this might be beyond a phase ofthe traditional market cycle.

Speaking for the Casualty segment, Stephen Kempsey, U.S.Casualty Practice leader for Marsh, says, “I don’t know if this isa cycle as much as it seems the way of the market going forward.The traditional hard/soft cycles — we haven’t really seen those forsome time.”

Sponsored Download

Download theseinformative survey results to get a better understanding of thecurrent landscape of agency growth, and learn the most effectivestrategies to grow your business.

Download Now

With so much capacity in the industry, he adds, “I don’t see itgoing back to the old up-and-down cycles here in the nearterm.”

In reinsurance, it’s been a longer-term change away from thetypical cycle. Chi Hum, global head of insurance-linked securitiesdistribution at New York City-based GC Securities, a division ofMMC Securities LLC, says up until about 20–25 years ago, there wasa fixed amount of capital in the reinsurance market, which led topredictable cycles. “Post event, rates would go way up, andeveryone would write a bunch of business, and then too much moneywould chase too little business and prices would go down,” he says,particularly in the Property Catastrophe sector.

Capital influxes

After 1992’s Hurricane Andrew, though, he says a new influx ofcapital came in through new companies formed in Bermuda. And theindustry has had other similar capital infusions since, in the formof cat bonds and sidecars. “With each influx of capital,” Hum says,“it starts to shave the peaks off [the traditional cycle] and alsonarrows the valleys, so the price declines start to bottom outsooner.”

Currently, Hum says, with various types of investors bringingcapital to the marketplace in a number of different ways,reinsurers are adapting, “and rather than look from afar atalternative markets and say it’s not sustainable, many of the bigreinsurers and insurers have looked for ventures to alignthemselves with that lower cost-capital model.”

Sidecars and other ventures, he adds, are examples of “verylarge insurers and reinsurers looking to align themselves with ahandful of capital providers that have a lower capitalcalculation.”

As such, the “new normal,” at least for reinsurance, may be moreof a “bifurcated cycle,” Hum says, as the range of capital at playsupports different risk profiles. Reinsurers preserve a moretraditional cycle and operating environment within a smaller bandof business — the riskier working layer just above the cedingcompany’s retention. But the reinsurers can also make use of thelower cost of capital provided by alternative markets for the moreremote business, potentially creating a less cyclical environmentin that layer of risk placement.

Here are the four trends that are shaping the U.S. Propertyand Casualty market this year:

Reinsurance rates are generally decreasing across most linesand geographies, thanks in part to a lack of significant lossevents. (Photo: iStock)

Trend No. 1: Slowing of reinsurance rate decreases, ledby alternative capital

Marsh’s report, referencing the previously released “GuyCarpenter 2016 Renewal Report,” says Jan. 1 reinsurance renewalsshowed generally decreasing rates across most lines andgeographies, thanks in part to a lack of significant loss events(below the 10-year average in 2015, according to the report). Butthe pace of decreases slowed compared with recent years.

U.S. Property Catastrophe saw decreases of 5% to 8% onaverage, compared to 7% to 14% a year ago. Property Cat, of course,is where the vast majority of alternative capital from variousinvestors has found a home, and while this new capital has keptcapacity abundant and pricing competitive, alternative capital maybe more responsible for the slowing of rate decreases thantraditional players.

Hum tells PC360, “The price decreases or cost decreases fromcapital and alternative markets firmed up a bit earlier than thetraditional markets.”

Explaining the reasons, he says the interest is still thereamong investors, but as rates have quickly fallen, investors havebeen hesitant to put more money in and accelerate the declines.

“Just from an investor discipline perspective, they started totake some money off the table” says Hum.

He says traditional players, meanwhile, are dedicated toinsurance and reinsurance and need to deploy their capital. Assuch, Hum says, “Alternative markets seem to have found a floorsooner.”

Alternative capital increased an impressive 13% in 2015, to$68 billion. (Photo: iStock)

Trend No. 2: Shifting reinsurancecapital landscape

The GC report Marsh references says total capital dedicated toreinsurance is estimated at $400 billion. Traditional capitaldeclined a bit, but alternative capital made up that difference.Alternative, or convergence, capital, which includes catastrophebonds, industry loss warranties, collateralized reinsurance andsidecars increased 13% in 2015 to $68 billion.

The primary focus of alternative capital continues to beProperty Cat, but the report cites some evidence of broadeningappetite. While the general feeling is alternative capital haslittle interest in the Casualty reinsurancesector, Hum says it’s not as simple as lumping investors togetherand saying they are interested or not interested in long-taillines. “Investors are multi-faceted,” he says.

He adds, “Property-catastrophe is kind of an easy entry point. Alot of it is modeled, a lot of it is bifurcated between remote andworking layers very similar to other capital market risks, and it’sshort-tail, so you know what your position is.”

But, he notes, there is a subset of investors that is “quitecomfortable with property catastrophe that wants to extend beyondit.” Others, he continues, say they do not like the volatility ofproperty catastrophe and would prefer longer tail lines that showless volatility and more premium stability.

“We have a stratification of investor interest,” Hum says.“There are investors that will do long-tail business. But thedeepest part of the market is still the more straightforwardproperty catastrophe.”

Whether investors understand the longer-tail risks they areeyeing is another matter, but Hum says they would not necessarilybe stepping into the shoes of traditional reinsurers, but ratherteaming up with underwriters that have a history and a trackrecord.

While investors themselves may not fully understand property orcasualty risks, Hum says, “They do have a discipline for how theyinvest, and how they invest in other portfolio managers who haveexpertise in unique risk classes.”

For traditional players, the report says increased evidenceshows capital slightly shifting to insurance lines fromreinsurance. “Furthermore,” it adds, “many reinsurers reducedcatastrophe exposure through the use of retro capacity, largelyfrom the convergence market.

Underwriters are sharpening their underwriting focus, asrates continue to soften. (Photo: iStock)

Trend No. 3: High capacity; softening rates inCasualty

Rates generally softened in 2015, andare expected to do so this year, Marsh says. Rates for GeneralLiability were typically down 10% to up 5% in Q4, Lead Umbrellarates were typically down 5% to up 5% with excess layers down 10%to up 5%, and Workers’ Comp rates were down 10% to flat forguaranteed cost programs and down 10% to up 5% to loss sensitiveprograms, even as medical costs increased.

And it’s not just overall rate changes. Kempsey says, “We’reseeing more clients get reductions and less clients get increases,and that’s kind of as important at rate changes.” He notes ratechanges can be influenced by a minority of clients getting steeperdecreases.

The report notes that, while rates are softening, underwritersare sharpening their underwriting focus. Kempsey says that means“increased scrutiny, more homework, more analytics, moreunderwriting referrals — and that probably results in a differenttype of risk selection or different attachment points.”

But he adds that many insureds in many lines will still bedesired. He says 80% of a portfolio may be desirable, with a lot ofcapacity competing for that business, but because of that capacity,less desired classes might also see more competition than one wouldassume.

“All want to write the 80%,” says Kempsey. “and the 20% — somemight not want to write it, but because they have to writesomething, there might be more competition even for that 20%.”

He also says “best in class” might vary from carrier to carrier,“so that 20% that is not desirable across the board might bedesirable for some.”

One standout in the casualty space is Commercial Auto. Kempseysays in a blog post that in Q4, “nearly half of all companiesrenewed with rate increases. And if losses continue to accumulate,this market is likely to remain challenging for most buyers in2016.”

He tells PC360, “There’s been a growing frequency and severityof Auto losses, and that’s causing that market to behave slightlydifferent” from the casualty market as a whole.

On the flip side, Workers’ Comp, which has traditionallyhas been a “topic of conversation” for the industry, “continues tobe favorable to insureds,” Kempsey says, with continuedimprovements in Combined Ratios.

Whether or not they are exposed to catastrophe risk,insurance rates for commercial properties continued to soften.(Photo: iStock)

Trend No. 4: Softening Property rates; favorable termsfor buyers

The Marsh report says Commercial Property rates continued theirtwo-year softening trend. Non-catastrophe-exposed properties sawrate decreases of between 5% and 10%, while cat-exposed propertiessaw decreases of between 5% and 15%.

Minimal cat losses, competition and the low cost of reinsurancehelped drive down rates, says the report. While competition was notbecause of a flood of new entrants, Marsh says existing insurersgenerally increased their underwriting capacity and grew theirbusiness. Capacity increased for named windstorm, storm surge andearthquake risks.

“Insurers generally have appetite for all types of propertyrisk,” Marsh says. “However some cat exposures, such as energyrisks and terrorism aggregation risks in major U.S. cities, may bedifficult to price.”

Insureds have been able to secure favorable terms and conditionsin 2015 as well, and that is expected to continue this year. Marshsays that, to lock in low rates, “many insureds sought to securemultiyear policies, to which insurers have become moreamenable.”

The report adds, “Insureds will likely see continuedimprovements in 2016 as insurers may be more willing to foregofurther rate erosion for an improvement in terms and conditions andoffer increased limits for the same or less-than-might-be-gainedrate decreases."

Related: 10 trends to affect the insurance marketplace in2016

Check us out on Facebook andgive us a Like