Commercial, Reinsurance Pricing Firms As Moody’s Improves Outlooks To Stable

Pricing in commercial lines and reinsurance appears to be firming, according to reports, and Moody's Investors Service has upgraded its outlook on both sectors to “stable” from “negative.”

Dallas-based insurance-exchange MarketScout's latest barometer, which tracks commercial-lines pricing in August, shows that average rates remain unchanged from July at minus-2 percent, indicating that property rates are continuing to firm, according to MarketScout CEO Richard Kerr.

Rates for both commercial property and business interruption were flat in August, compared to minus-2 percent in July, MarketScout says. Employment-practices-liability insurance exhibited more firming in August, going from flat to plus-2 percent. Crime lost some ground, from plus-1 percent to flat.

By account size, MarketScout says small accounts edged up during the month, from plus-1 percent to plus-2 percent, while medium accounts edged up from minus-2 percent last month to minus-1 percent.

Both large accounts ($250,000-$1 million in premium) and jumbo accounts (over $1 million) were unchanged on a month-to-month basis at minus-3 percent and minus-4 percent, respectively.

Moody's says pricing for both commercial and specialty insurers seems to be stabilizing after eroding over the last five to seven years. Recent catastrophe losses and changes to widely referenced catastrophe models “will help to push up renewal rates for primary property-insurance coverages,” Moody's notes.

Casualty lines, though, which represent about three-fourths of commercial-insurer premiums, “will likely experience weaker results, given already high combined ratios, and—by our estimates—recent weak accident-year reserve margins,” Moody's says.

Absent a sharp upward pricing swing from a “potential shock to the system,” profitability for casualty lines will remain pressured over the next 12 to 18 months. But the rating agency adds, “Notwithstanding these pressures, and in part because of them, we expect that pricing stability or strengthening going forward will help to soften the cumulative impact for the recent down cycle and to ensure that it does not approach the depths of the prior down cycle in 1997-2001.”

Justifying the stable outlook for the commercial-lines sector, Moody's says that in addition to pricing stabilization, commercial-lines insurers show solid capital adequacy and balance-sheet strength, as well as strong asset quality and conservative investment profiles, an overall sound reserve position and strong holding-company liquidity.

For reinsurers, Moody's also mentions cat losses as providing momentum for reinsurance rates to harden.

The cat losses this year have also led to a halt in reinsurers' capital growth that occurred in 2009 and 2010. Moody's says this capital development has “at least moderated somewhat the supply/demand imbalance” for reinsurance.

Capacity still appears ample, Moody's says, but the rating agency notes that capital positions may not be as strong as they seem, and while reinsurance demand is restrained for now, further reduction in capacity could tip the scale in the other direction. “One large hurricane could tip the balance in favor of demand over supply, as it would almost certainly lead to reduced equity at year-end 2011, for some companies significantly so,” Moody's says.

Moody's also is seeing increased possible interest in reinsurance from primary carriers. Moody's explains that it recently surveyed primary insurers in the U.S. and Europe, and more are now saying they are “uncertain” as to whether they plan to buy more reinsurance protection, as opposed to stating a clear “no” last year. While primary insurers' balance sheets strengthened in 2010, allowing them to retain more risk, Moody's believes the primaries have “little flexibility left in further reducing reinsurance usage.”

But reinsurers will have to contend with pressure to short-term profitability, as pricing has been competitive in the recent past, investment returns remain suppressed because of low yields, and reinsurers have already exceeded their cat budgets for 2011, Moody's says.

Speaking to the soft-market cycle impacting both insurers and reinsurers, Moody's drew some distinctions between the current cycle and the previous soft market of 1997-2001. The rating agency says this time around, there is not an abundance of underpriced reinsurance capacity, and there is a broader awareness of executives' and chief actuaries' critical roles in assuring a timely feedback loop among underwriters, claims adjusters, and pricing and reserving functions.

“Finally,” the rating agency adds, “Moody's believes that the establishment of more formalized risk-management protocols and the demands of Sarbanes-Oxley compliance today provide a more robust framework for a stricter adherence to prudent standards, as well as a clearer set of tolerances for error and consequences for failure to adequately manage the core business and financial risks.”