Improved price environment in u s commercial insurance

Improved Price Environment in the US Commercial Insurance April 2013 BLOG POST

Improved Price Environment in US Commercial Insurance Commercial lines insurance rates are expected to increase in 2013 based on factors such as; above average losses, low investment returns and receding reserve releases. However, the market is not “hardening” – price increases are not uniform, plenty of capacity and intense competition is existent among insurers. The pricing would generally continue to increase for U.S. P&C insurers, which however, may not be enough to offset multi-year price declines and low-cost trends.

US Property and Casualty Industry (Nine-Month 2012 Financial Highlights – USD Mn)1 9 Months 2012

9 Months 2011

Change

Net Premiums Written

345.4

330.8

4.4%

Net Underwriting Gain (Loss)

(4.4)

(30.4)

NM

Net Investment Income

35.8

36.3

-1.3%

Net After-Tax Income

31.2

12.3

152.7%

Policyholders’ Surplus

579.4

537.0

7.9%

Combined Ratio

100.1

108.5

-8.4

Superstorm Sandy’s effect was supposedly one of the costliest (in the range of USD 25 Bn) in U.S. history and it has prompted underwriters to seek clarification definitions, higher rates and tighter terms and conditions. However, it is not forcing hardening of the overall market as insurers’ have strong capital reserves.

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Marsh : United States Insurance Market Report – 2013

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0.7%

2.0%

4.7%

4.7%

3.5%

4.0%

2.0%

6.0%

3.7%

Annual Average P&C Rate Change 2009 – 20132

0.0%

-10.0%

-8.0%

-1.0%

2010 Q1

-3.7%

-4.7%

-2.8%

-3.3%

2009

-4.7%

-8.0%

-6.3%

-6.0%

-4.3%

-3.8%

-4.0%

-4.7%

-2.0%

2011 Q2

2012 Q3

2013

Q4

Average of Jan – Mar is considered in 2013

The above graph indicates annual average P&C rate change over the last five years; it showcases how the rates have increased from 2009 (-8%) to 2013 (5%), excepting 2009 Q4 and 2010 Q4; where the rates have dropped with respect to their previous quarters.

Most of the losses would be borne by primary writers particularly those with high Northeast exposure, because they generally retain greater property catastrophe risk at lower risk levels. Many insurers’ have retained catastrophe losses in their reinsurance treaties to combat rising reinsurance costs, due to their strong capital.

Insurance Market Condition1 According to a recent survey commercial insurance prices rose by almost 7% in aggregate during the fourth quarter of 2012, marking the eighth consecutive quarter of price increases. Workers compensation and employment practices liability had the largest price increases (both approaching double digits) year on year.

In 2013, many clients could face challenging renewals across lines and industries, as insurers continue to adjust their pricing and coverage to maintain profitability. However, clients that provide complete underwriting submissions with accurate and high-quality data would be best placed to receive favorable terms and conditions; including lower pricing.

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Market Scout

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COVERAGE

Property

SEGMENT

RATE CHANGE Q4 2012

RATE CHANGE Q4 2011

Non-CAT*-Exposed Organizations

5% decrease to 5% increase

10% decrease to 10% increase (depending on use of incumbents)

Moderately CATExposed Organizations (1% to 30% of values in CAT zones)

Flat to 10% increase

Flat to 10% increase

Largely CAT-Exposed Organizations (more than 30% of values in CAT zones)

5% increase to 15% increase

10% increase to 30% increase or higher if exposure was severe

Loss-Driven Organizations

Flat to 15% increase

10% increase and higher

The above represents the typical rate change at renewal for average/good risk profiles * Catastrophe

CAT-exposed companies averaged 5% increases at renewal in the first two quarters of the year; in the third quarter, the average increase had dropped to 3.5%.

COVERAGE Worker’s Compensation General Liability Automobile Liability Umbrella and Excess Liability

SEGMENT

RATE CHANGE Q4 2012

RATE CHANGE Q4 2011

Guaranteed Cost

5% decrease to 5% increase

10% decrease to 10% increase

Loss Sensitive

5% decrease to 5% increase

5% decrease to 5% increase

Guaranteed Cost

5% decrease to 5% increase

10% decrease to 5% increase

Loss Sensitive

5% decrease to 5% increase

Flat to 10% decrease

Guaranteed Cost

5% decrease to 10% increase

5% decrease to 5% increase

Loss Sensitive

5% decrease to 10% increase

5% decrease to 5% increase

Lead

Flat to 5% increase

Flat to 10% increase

Excess Layers

Flat to 5% increase

Flat to 5% increase

The above represents the typical rate change at renewal for average/good risk profiles

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In 2012, the workers’ compensation (WC) line of business continued to operate at a historically unprofitable level. Higher retentions and rate increases are to be carried out by insurers in 2013 in order to make the WC line of business profitable. In 2013 we are expected to see rate increases in the general liability (GL) insurance market, after being stable in 2012. With some reductions and more renewals experiencing flat rates, auto liability insurance rates remained stable in 2012. Large fleets drew higher attachment points. Auto liability insurance was used by many insurers to help balance their WC line of business. Pressure continued to build in the lead umbrella insurance market; entering 2013, with a particular focus on attachment point and price.

M-o-M Premium Growth Trends by Coverage Class (for March 2013)2 5%

5%

5%

5%

5%

3%

3%

3%

3%

Commercial Property

Business Interruption

BOP

Inland Marine

General Liability

Umbrella / Excess

Commercial Auto

Worker's Compensation

EPLI

Fiduciary

2%

Crime

Surety

3%

Professional Liability

3% 2%

D&O Liability

4%

In March 2013 month-over-month (M-o-M); worker’s compensation (WC), commercial auto, umbrella/excess, BOP and commercial property witnessed the highest gains (5%), followed by general liability, the lowest being surety and EPLI. WC was down by 1% (Feb’ 2013) and surety was up by 1% (Feb’2013).

Pricing trends for commercial lines in the year ahead1 In property lines CAT market is expected to remain flat and the non-CAT market could offer average rate decreases in range of 5-10%. Casualty lines could experience average rate increases in the range of 37.5%. Average rate increase of flat to 7.5% (in Umbrella) and 2-15% (in Excess) are expected in 2013.

Worker’s Compensation could experience an average rate increase of 2.5-7.5%, with highest average rate hikes in New York, California and Florida, while Auto liability could experience 2-5% of average rate increases.

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