The story for the insurance industry in 2015 and heading into 2016 is one of high capacity, competition and softening rates.

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

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

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

In reinsurance, it’s been a longer-term change away from the typical cycle. Chi Hum, global head of insurance-linked securities distribution at New York City-based GC Securities, a division of MMC Securities LLC, says up until about 20–25 years ago, there was a fixed amount of capital in the reinsurance market, which led to predictable cycles. “Post event, rates would go way up, and everyone would write a bunch of business, and then too much money would 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 of capital came in through new companies formed in Bermuda. And the industry has had other similar capital infusions since, in the form of cat bonds and sidecars. “With each influx of capital,” Hum says, “it starts to shave the peaks off [the traditional cycle] and also narrows the valleys, so the price declines start to bottom out sooner.”

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

Sidecars and other ventures, he adds, are examples of “very large insurers and reinsurers looking to align themselves with a handful of capital providers that have a lower capital calculation.”

As such, the “new normal,” at least for reinsurance, may be more of a “bifurcated cycle,” Hum says, as the range of capital at play supports different risk profiles. Reinsurers preserve a more traditional cycle and operating environment within a smaller band of business — the riskier working layer just above the ceding company’s retention. But the reinsurers can also make use of the lower cost of capital provided by alternative markets for the more remote business, potentially creating a less cyclical environment in that layer of risk placement.

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

Reinsurance rates are generally decreasing across most lines and geographies, thanks in part to a lack of significant loss events. (Photo: iStock)

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

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

U.S. Property Catastrophe saw decreases of 5% to 8% on average, compared to 7% to 14% a year ago. Property Cat, of course, is where the vast majority of alternative capital from various investors has found a home, and while this new capital has kept capacity abundant and pricing competitive, alternative capital may be more responsible for the slowing of rate decreases than traditional players.

Hum tells PC360, “The price decreases or cost decreases from capital and alternative markets firmed up a bit earlier than the traditional markets.” 

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

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

He says traditional players, meanwhile, are dedicated to insurance and reinsurance and need to deploy their capital. As such, Hum says, “Alternative markets seem to have found a floor sooner.”

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

Trend No. 2: Shifting reinsurance capital landscape

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

The primary focus of alternative capital continues to be Property Cat, but the report cites some evidence of broadening appetite. While the general feeling is alternative capital has little interest in the Casualty reinsurance sector, Hum says it’s not as simple as lumping investors together and saying they are interested or not interested in long-tail lines. “Investors are multi-faceted,” he says.

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

But, he notes, there is a subset of investors that is “quite comfortable with property catastrophe that wants to extend beyond it.” Others, he continues, say they do not like the volatility of property catastrophe and would prefer longer tail lines that show less volatility and more premium stability.

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

Whether investors understand the longer-tail risks they are eyeing is another matter, but Hum says they would not necessarily be stepping into the shoes of traditional reinsurers, but rather teaming up with underwriters that have a history and a track record.

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

For traditional players, the report says increased evidence shows capital slightly shifting to insurance lines from reinsurance. “Furthermore,” it adds, “many reinsurers reduced catastrophe exposure through the use of retro capacity, largely from the convergence market.

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

Trend No. 3: High capacity; softening rates in Casualty

Rates generally softened in 2015, and are expected to do so this year, Marsh says. Rates for General Liability were typically down 10% to up 5% in Q4, Lead Umbrella rates were typically down 5% to up 5% with excess layers down 10% to up 5%, and Workers’ Comp rates were down 10% to flat for guaranteed cost programs and down 10% to up 5% to loss sensitive programs, even as medical costs increased.

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

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

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

“All want to write the 80%,” says Kempsey. “and the 20% — some might not want to write it, but because they have to write something, 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 be desirable for some.”

One standout in the casualty space is Commercial Auto. Kempsey says in a blog post that in Q4, “nearly half of all companies renewed with rate increases. And if losses continue to accumulate, this market is likely to remain challenging for most buyers in 2016.”

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

On the flip side, Workers’ Comp, which has traditionally has been a “topic of conversation” for the industry, “continues to be favorable to insureds,” Kempsey says, with continued improvements 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 terms for buyers 

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

Minimal cat losses, competition and the low cost of reinsurance helped drive down rates, says the report. While competition was not because of a flood of new entrants, Marsh says existing insurers generally increased their underwriting capacity and grew their business. Capacity increased for named windstorm, storm surge and earthquake risks. 

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

Insureds have been able to secure favorable terms and conditions in 2015 as well, and that is expected to continue this year. Marsh says that, to lock in low rates, “many insureds sought to secure multiyear policies, to which insurers have become more amenable.” 

The report adds, “Insureds will likely see continued improvements in 2016 as insurers may be more willing to forego further rate erosion for an improvement in terms and conditions and offer increased limits for the same or less-than-might-be-gained rate decreases."

Related: 10 trends to affect the insurance marketplace in 2016

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