“In the large risk space, the capacity available, mixed with the absence of U.S. catastrophic incidents, has led to rate decreases for many insureds beginning early in 2014,” says Rob Stein, chief broking officer of U.S. retail operations at Aon Risk Solutions. “It will be interesting to see, after having already gone once through a full market cycle, the reaction of the underwriting community towards continuing the current trending of renewal price and terms.”

Net income among P&C insurers rose 6.4% in 2014's first half, to $26 billion, according to data from the Insurance Services Office and the Property Casualty Insurers Association of America. Net written premiums rose 4.0% to $246.4 billion. Underwriting profitability slipped slightly, 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 market have but one hope for a swing: a major catastrophic loss. Yet with policyholders' surplus at $700 billion, losses would have to top at least $70 billion to really move the needle on pricing, according to analysis by property catastrophe wholesale intermediary NAPCO. Zurich General Insurance CEO Michael Kerner was quoted in August as saying that even a $100 billion disaster would be absorbable by the industry, given the growing market for cat bonds.

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

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

LINES TO WATCH

By now it may seem like we've been talking about Cyber coverage for 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 or security breach at major retailers across the U.S.; at the time of this writing, J.P. Morgan Chase, Dairy Queen, Home Depot and even the U.S. Postal Service were the latest to make headlines for having their customers' information compromised. It seems likely that more corporations will be affected before the holiday season is over.

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

“It's hard for them to comprehend the scope of loss,” says Wally Bryce, Arthur J. Gallagher's strategic planning leader for its retail P&C brokerage operations in the U.S., adding that middle-market companies are not as concerned about a breach as their public brethren. It is hard for potential clients to clearly understand the coverage as well as they would with, say, earthquake cover or even general liability; customers find those covers easier to conceptualize.

Bryce feels that “Cyber” cover is actually misnamed. “It's really 'privacy' or 'breach of privacy,'” he says. “It's more well-positioned to call it that, in the marketplace. From a positioning point of view, the insurance industry may be getting that wrong.”

“The Cyber insurance market is experiencing exploding demand,” says Christopher Lang, U.S. placement leader at Marsh. Recent events in 2014 have highlighted the need for a comprehensive approach to Cyber/Privacy risk management, he adds, and coverage is evolving to meet client needs. “Pricing is evolving as carriers react to a high degree of competition for capacity as measured against the ongoing evaluation of the underlying risk.”

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

Environmental coverage is another line that producers would do well to keep an eye on. It's worth noting that the frequency of claims in this line has continued to rise 20%-30% each year since 2009, and these are often not claims of low severity. Specialization is critical in writing this line, and highly publicized catastrophic claims have led to more regulatory scrutiny on transportation/railroad, mining, energy and pipeline exposures, according to Willis' “Marketplace Realities 2015” report, spurring many underwriters to re-evaluate the exposures in these sectors.

Willis forecasts that clients combining Environmental and casualty coverage could be looking at price increases of as much as 25% in 2015, especially those without Sterling loss histories. Exposure class and claim history, the brokerage notes, are the primary rate drivers in Environmental.

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

“It's better, but cautiously better,” says Bryce. The California market, the largest in the country for Workers' Comp claims and costs, “affects everyone's thinking about the comp market in general. You can't ignore that.” Still, rate increases in the Golden State are at their lowest levels in years, Willis notes, and 15 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 the market is seeing some trends toward rate moderation.

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

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

The implementation of the Nonadmitted and Reinsurance Reform Act continues to improve the compliance process for the surplus lines industry. By isolating the regulation and taxation of surplus lines transactions to one state, the home state of the insured, NAPSLO members report a more efficient operating environment in a number of states.

DIGITAL TOOLS' EXPANDING ROLE

“This will go down as the year of continued expansion of technology into everything we do,” says Patricia A. Borowski, senior vice president, industry affairs for the National Association of Professional Insurance Agents. To the great benefit of independent agencies, she adds, the doors on all forms of social media have been torn off, “and this new method of communication is fast becoming a part of every insurance operation. This change is so fast and significant that independent insurance agencies and carriers—even those with the most resources—struggle to keep pace with these trends, while trying to keep them integrated into their current systems and looking for real ROI.”

Borowski maintains that 2015 will be the year when the next big upgrade shift in insurance technology will begin. For their own business reasons, independent agencies will continue to evolve with new technology, as well as new ways of operating and marketing themselves. “Apart from what carriers are trying to figure out, independent agency owners know that they must more broadly adopt the options technology has to offer them and all the ways in which they do business,” she adds. “They have a good sense of the direction they must go to continue being successful; they are asking the right questions and working out their answers.”

Consumers, says Bryce, expect a digital experience when making their insurance purchases: “People may not necessarily want to talk to 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 provide an increasingly digital experience, going forward.”

Brian S. Cohen, operating partner for Altamont Capital Partners in Palo Alto, Calif., believes it's still anyone's game between the independent-agent system and direct writers, “and the ultimate winners will be those independent brokers who really embrace digital and all you can do with it,” he says. “The independent broker is the only individual that can provide the local, trusted advice that people are looking for, but in a technologically efficient way. There are going to be winners and losers. Those brokers who basically put their heads in the sand are condemning themselves, in my view, to a slow death.”

While the value, expertise and service capabilities of brokers and agents can never be diminished, adds Stein, the proliferation of unique marketing-driven identities currently driving production of personal lines business make it easy to believe a new thinking around distribution platforms may soon develop in the small commercial arena as well. “Perhaps not next year, but shortly down the road, successful distribution-focused companies known predominantly for their ability to showcase content and/or products, such as Amazon and Google, could likely become a part of the conversation.”

PRESSING ISSUES FOR PRODUCERS

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

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

The ongoing mergers and acquisitions trend continued in 2014, which reduced the number of insurance enterprises in the marketplace. The unintended result is a concentration on a few large, more centralized players focused on putting more choices under a single umbrella rather than specialist organizations, says Heinze.

“We have been in a period that has been very active” when it comes to M&A, says James Campbell, principal at Reagan Consulting in Atlanta. A lot of this activity is being driven by—you guessed it—private equity. “There is more private equity looking to invest or actively invest in the industry than we have seen before,” he says. “Private equity buyers have gone from a marginal player to the most active buying group in the industry.”

This tremendous demand from private equity has driven up both valuation deals and overall M&A activity. “This will be something that's interesting to watch,” Campbell adds. Private equity firms, he explains, are attracted to the basic economics of this industry: “interest rates are low, they like the performance trending, and value growth trending has been positive in the industry.”

In the wholesale space, Heinze says 2015 will see firms gaining a better understanding of emerging risk and analytics on underwriting and how to handle claims when they arise—something that's already happening on the Ebola front. “Just in the last week, we've seen big changes in how to handle a patient regarding testing,” he notes. “We're getting a better understanding of the risk. Insurance has always looked at what lies further ahead than what we see now, but now we need to be able to see not just ahead of the curve, but around it, using the best processes we have to analyze what's currently taking place and how it will affect new things.

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

With additional reporting by Laura Toops & Melissa Hillebrand