Continued softening ahead for U.S. property risks in 2015: Willis

North American commercial property rates are predicted to fall by between 12.5% – 15% throughout the rest of 2015, as ample capacity and low levels of catastrophe losses aggravate current insurance and reinsurance market trends, according to Willis Group.

International risk advisory, insurance and reinsurance intermediary, Willis Group Holdings plc., has published a new report examining rate activity and trends for North American insurance business lines, titled, “Willis’ Marketplace Realities Spring Update.”

The firm expects rate declines of up to 15% on property lines for both catastrophe and non-catastrophe exposed risks, emphasising the impact large volumes of alternative and traditional reinsurance capital is having on the wider risk finance world.

As the influx and resulting abundance of alternative reinsurance capital continues to flood the space, ensuring cheaper reinsurance, coupled with low levels of catastrophe losses, the challenging market environment becomes exacerbated.

“Capital markets continue to impact the reinsurance market as insurers have been able to replace the highest priced reinsurance capacity with this alternative capacity,” notes the report.

According to reinsurance giant Swiss Re, notes Willis, international property losses amounted to $34 billion in 2014, down $11 billion on the previous year and some $30 billion below the ten-year average.

German reinsurer Munich Re also reported benign insured catastrophe losses for last year, totalling just $31 billion.

And Willis predicts that low cat loss levels will continue to show some benefit to an otherwise pressured reinsurance sector, saying, “the reinsurance market continues to make not insignificant returns, due mainly to the favourable loss experience.”

Artemis has covered reports on U.S. commercial P&C rates in past months; most recently this includes MarketScout’s Insurance Barometer study that shows rates in the sector have been deteriorating for some time.

Bearing in mind that North American property rates are projected to soften further, insurance-linked securities (ILS) players are increasingly seeking more direct access to the U.S. property insurance market as well, perhaps prolonging the soft market cycle.

As ILS entities continue to provide risk capital to back global re/insurers or fronting carriers and also begin to build direct relationships with brokers through follow-form facilities, the asset class’ enhanced focus on the sector may signal that soft property insurance market fears are underdone.

But not everyone shares this view, adopting a different outlook to the P&C market, investment research and management firm Bernstein recently said, “persistent fears of a classic soft cycle in commercial P&C are simply overdone, and even after three years of strong momentum, this implies there remains good value in quality P&C.”

Only time will tell just how soft the market will turn throughout the remainder of 2015 and into next year. However Willis believes that profitability is already on the wane.

Forecasting U.S. property rates for the coming months, Willis said; “Despite falling rates, most Property insurers should see a reasonable return on their respective portfolios, albeit not to the levels achieved in 2013. According to recent reports, the 2014 midyear combined ratios for the top insurers averaged 94.”

Adding that the firm is watching the declining rates trend carefully as further softening would not be a surprise.

Concluding; “Insurance carrier appetite for this risk remains strong and with increased carrier capacity, buyers are enjoying ample options in determining where to place their business in 2015.”