Third-party capital not having a marked effect on commercial lines, yet

The influx of capital into the reinsurance market from third-party, capital market investor sources, may be impacting property catastrophe rates but is not yet having an impact on U.S. commercial line insurance renewals, according to the latest Commercial Lines Insurance Pricing Survey (CLIPS) from Towers Watson.

The influx of third-party reinsurance capital into the property catastrophe reinsurance market has had a marked effect on the recent June 1 reinsurance renewals, exerting pressure on renewal pricing. The twin effects of increased catastrophe reinsurance capacity and a willingness to take on more risk for a lower return due to lower capital costs, which are the features of the current third-party capital trend, is beginning to exert influence on property catastrophe insurance renewals as well.

However the commercial lines business in the U.S. is still seeing price increases, according to this insight from Towers Watson, which sees insurance carriers report price increases across commercial lines business of 7% in aggregate for the first quarter of 2013. The CLIPS survey from Towers Watson, which compares quarterly renewal pricing from one year to the next, has now seen more than two years of consecutive overall price increases and the currently surveyed quarter is the fifth consecutive to see increases across every line surveyed.

It is taking time for the effects of third-party capital to be felt across the broader insurance market. As we wrote recently here, the decline in pricing seen in property catastrophe reinsurance lines of business caused by capital markets and alternative capacity sources can sometimes still be offset by rate rises on U.S. property and casualty insurance rates.

Property lines of business is where the smallest price gains have been seen in this survey, according to Towers Watson, perhaps surprisingly given the impact that hurricane Sandy was expected to have on rates.

Tom Hettinger, sales and practice leader for the Americas in Towers Watson’s Property & Casualty business unit, commented; “Interestingly, pricing for property grew only modestly, with less movement than might have been expected considering losses related to Hurricane Sandy.”

Towers Watson put this slowdown in P&C insurance rates down to an abundance of cheaper reinsurance protection for those lines of business. Hettinger added; “That is not surprising, as there is plenty of reinsurance capacity out there.”

“Capacity has definitely increased for property reinsurance, as mainstream investors are joining specialists in the search for yields, specifically through alternative investments such as catastrophe bonds and collateralized reinsurance,” commented Bob Betz, Florida practice leader of Towers Watson’s Brokerage business.

Towers Watson also noticed the impact of mainstream investor capital on the recent June 1 renewals, seeing some price reductions of above 20%. Betz continued; “June renewals of Florida personal lines business are an example of additional capacity significantly lowering prices on a risk-adjusted basis. We see reductions of 15% to 20%, and even more in isolated cases.”

While the influence of third-party capital on the broader insurance and reinsurance markets is being felt via increased catastrophe reinsurance capacity it has not yet had a marked effect on these commercial line renewals in Q1. It will likely take time for any impact to filter down to those lines of business but eventually, even if the new capacity is not being put to work on underwriting these lines specifically, the impact of third-party reinsurance capital will eventually be felt across the market, unless we see any rate-changing events such as major catastrophes in the meantime.

It will be interesting to see whether commercial lines insurance price increases can be sustained through the rest of this year, or whether third-party capital and the resulting abundant reinsurance capacity will begin to exert pressure there too.

You can read more about the survey results here: Commercial Lines Insurance Pricing Survey (CLIPS) from Towers Watson.