Following a surprise 1% rate increase across U.S. commercial property and casualty (P&C) lines during July, rate movements remained flat in August, in line with the trend witnessed from March through June, according to the latest industry commentary from MarketScout and KBW.
“We expect rates to turn modestly negative in the coming months as the industry adjusts to significant excess capital,” said Keefe, Bruyette & Woods (KBW) analysts, a prediction they’ve held for U.S. commercial P&C rate movements since the beginning of the year.
Significant levels of reinsurance capacity from third-party and traditional sources continues to flood the sector, negatively impacting reinsurance pricing and increasingly filtering down into primary lines, with particular pressure being felt by commercial property operations.
Analysts at KBW noted that July’s surprise 1% uptick in rate movement was perceived as somewhat of an anomaly, so it’s not too surprising to see U.S. commercial P&C rates return to flat again in August.
Richard Kerr, Chief Executive Officer (CEO) of MarketScout commented; “Thus far, 2015 is proving to be a steady year. Rates were up very slightly in February and July but all other months were flat.”
Broken down by account size, MarketScout’s monthly insurance barometer reveals that jumbo accounts (over $1 million) reported a 3% decline during August, following a 2% decline witnessed in July and June.
While small (up to $25,000) sized accounts, medium ($25,001 – $250,000) sized accounts, and large ($250,001 – $1 million) sized accounts all remained flat during August.
“Again, it appears soft markets are not as soft as they once were and hard markets aren’t as hard. The cycles are moderating, probably because underwriters have so many tools to assure pricing is appropriate. These tools and increased board level oversight keep the cowboys in check – at least most of the time,” added Kerr.
Of course the moderation of the cycle has also been partly attributed to excess capital, including that from alternative reinsurance sources, which is now spreading softening to the insurance lines as well. It will be interesting to see how commercial insurance rates behave through the coming months.
Analysts at KBW say, as evidenced in the chart below, that the y/y change shows a 1% decline in August, compared to a 0.5% dip in July, leaving the analysts to believe “that this underlying cycle effectively predicts near-term pricing behaviour, the second derivative has remained negative YTD, and we think it points to more near-term pricing pressure.”
With the trend of excess capacity in the global reinsurance industry set to continue throughout 2015 and into next year, it’s hard to see any positive rate movements in the U.S. commercial P&C space happening anytime soon.
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