Softening commercial P&C insurance market down 3.3% in Q2

Commercial P&C insurance rates across the U.S. continued their downward trend during Q2 2015, with prices declining by an average of 3.3%, according to the Council of Insurance Agents and Brokers (CIAB) as excess insurance and reinsurance capacity impacts primary business lines.

The overspill of capacity and competition into the more accessible lines of the commercial primary insurance market continues apace, with reinsurance companies shifting capacity to commercial insurance lines and some alternative capital also beginning to impact the sector, raising competition and depressing pricing as a result.

A recent Commercial Property and Casualty (P&C) Market Index Survey report from the CIAB and accompanying commentary from financial services firm, Keefe Bruyette & Woods (KBW), reveals that commercial insurance experienced a 3.3% average decrease during the second-quarter of 2015, maintaining the downward trend witnessed in Q1.

The most significant decline across the U.S. commercial insurance sector was witnessed in commercial property lines, which declined by 5.4% during the three months of Q2. KBW notes that commercial property lines in particular have seen price declines exacerbated by continued benign catastrophe losses and “significant excess reinsurance capital.”

Average commercial P&C insurance rate changes by quarter

Ken A. Crerar, President and Chief Executive Officer of the CIAB, commented; “These results are consistent with the decreases we saw at the end of 2014 and Q1 2015 across all account sizes. As the soft market continues in 2015, carriers are competing for good risks and are willing to work with brokers on price and terms.”

Broken down by account size, the CIAB reports that as in Q1 2015, large accounts again witnessed the steepest declines at 5.2%, while medium-sized accounts dipped 3.2%, and small-sized accounts declined by an average of 1.3%.

The glut of alternative and traditional sources of reinsurance capital in the sector is increasingly impacting an array of primary business lines, casualty included, as intense competition ensures the trend of traditional reinsurance players redeploying capital away from property catastrophe lines remains.

It’s no surprise to see commercial property insurance rates the most impacted by the growth of alternative reinsurance capital and ILS, causing the increased competition in key markets and encouraging reinsurers to focus capacity on P&C insurance lines instead.

Similarly it’s no surprise to see the large accounts decline fastest, as this is where the global, diversified reinsurance players will be focusing their corporate re/insurance activities and hoping to pick up business to replace where they have reduced capacity in property catastrophe lines.

But the decline in commercial lines of insurance is now expanding across the sector, likely being caused by now insurers seeking out better opportunities and so the over-spill and supply of capacity cascades throughout that sector as well.

In fact, as KBW points out, the “only lines of business with 2Q15 rate increases were commercial auto, D&O, and employment liability, which means that the industry is still focusing on line-specific profitability.”

The CIAB reported that a broker from the Southeast U.S. commented that there is “still excess capacity in the marketplace. Carriers want to write new business, especially if it’s larger and has a good loss history.”

Another respondent from the Southeast explained to the CIAB that the market saw “more aggressive pricing for workers’ comp and property lines” while a broker from the Midwest said that “underwriting capacity for property has increased significantly as evidenced by rate decreases and improved terms and conditions.”

As you can see from the chart below, which breaks down price movements by small, medium and large accounts, the commercial P&C insurance market is increasingly softening, but is not yet at a stage where it would be widely considered a soft market. However, soft market status may only be a few more quarters away if the current trend persists.

Average commercial P&C insurance rate changes by account size

On average, during the first-quarter of 2015 U.S. commercial P&C rates declined by 2.3%, and in Q2 2014 the average decline across all account sizes reported by the CIAB was 0.5%, so the continued, downward trend is clear to see.

And, with the expectation that the excess of alternative and traditional reinsurance capacity is set to continue it’s likely that greater pressures on primary commercial business lines will remain and intensify, especially if the benign catastrophe loss period continues at the same time.

Looking forward at the U.S. commercial P&C rates KBW said; “We expect commercial rates to keep declining in 2015 and into 2016; excess capital and recent strong underwriting profits should pressure industry pricing, although still-low interest rates likely preclude more drastic rate decreases.”