Capital a key determinant in ongoing insurance rate decline: Marsh

by Artemis on November 25, 2015

For the tenth consecutive quarter global commercial insurance rates have declined across the majority of business lines, as excess capacity and a lack of large loss events challenges companies’ profitability, according to analysts at Marsh.

“The third quarter of 2015 experienced commercial insurance rates declining globally in all regions and most lines of business,” says Marsh, adding that renewal rates declined in all areas during Q3, resulting in a 4.8% global composite decline.

According to Marsh, the UK and Asia-Pacific posted the greatest composite rate decreases, followed by Continental Europe, Latin America and then the U.S. While it’s a little strange to so the U.S. feature last in that list, it is likely because insurance rates there fell first and faster, due to the influence of excess reinsurance capital on that marketplace.

Average Insurance Renewal Rate Change Ranges by Region and Line of Business Q3 2015

Average Insurance Renewal Rate Change Ranges by Region and Line of Business Q3 2015 - Source: Marsh Global Analytics

“Market surplus continues to be robust based on historical levels, and is one of the largest determinants of rate activity,” explains Marsh.

Marsh adds that the flood of alternative capital into the insurance and reinsurance sector continues to fuel transactions, highlighting the recent $275 million Amtrak catastrophe bond as an example of this.

The rise of alternative capital continues to pressure the global insurance and reinsurance market, resulting in a competitive landscape and an abundance of more efficient capital, a further driver of rate declines.

Ample capacity in the reinsurance sector has created a supply/demand imbalance, a trend that is exacerbated by the benign loss environment, and that has resulted in reinsurers increasingly looking to access the returns of primary business lines, continuing to drive down rates and push up competition.

“Without the near-term catalyst that larger wind or earthquake events have historically provided, the property rate environment continues to be competitive with most accounts typically seeing rate decreases at renewals,” said Nick Holmes, Marsh’s head of placement for Continental Europe.

During the third-quarter of 2015 Marsh reports that property insurance rates experienced the steepest declines, averaging more than 5% globally, of which the most pronounced dips were felt in the Asia-Pacific region, with the smallest decreases being seen in Latin America and the UK.

Casualty lines, while declining less than property, on average, still reported average decreases of between 2% and 4%, again with the steepest declines occurring in the Asia-Pacific, and also in the UK.

Moving away from the rate declines in property and casualty business lines, Marsh reveals that financial and professional lines presented varied rate movements in Q3. The U.S. and Latin America both reported slight rate increases for this line of business, however, the global composite index for financial solutions declined by 5%.

The chart below, Marsh’s Global Insurance Index, reveals how global commercial insurance rates have now declined for ten quarters in a row, starting from early 2013.

Marsh Global Insurance Index

Marsh Global Insurance Index - Source: Marsh Global Analytics

“With strong capital and surplus levels, the market remains competitive, with expected line of business and regional variations continuing,” said Marsh.

With rate decreases across the majority of business lines, and by more than 7.5% in some regions during the third-quarter, cyber insurance rates did provide some positive movements during the period.

“Cyber insurance stood out in the third quarter as the only line with consistent, large rate increases, averaging more than 15% in the U.S.,” notes Marsh.

The potential severity and frequency of cyber threats has grown in recent times, with companies now more aware that attacks can occur internally as well as externally, says Marsh, resulting in an average cyber insurance limit increase during Q3 of beyond $20 million for the first time.

In fact, purchased cyber coverage limits were up by more than 10% in the third-quarter of 2015, when compared with the same period last year, notes Marsh.

“This quarter, cyber insurance was a clear outlier with rates increasing more than 15% against overall rate levels, which showed a decrease of 5%. This type of differentiation in pricing signifies that market’s need to segment its book of business based on views of the underlying exposure to risk and potential losses,” explains Marsh.

Clearly, capital in the insurance and reinsurance sector remains abundant, while the opportunities to deploy it are perhaps not so plentiful.

But until advanced modelling capabilities and other determining factors lead to a greater understanding of emerging risks, and enable/ease the entry of alternative capital into existing, developed business lines that are perhaps less competitive and pressured, it’s likely pressure on commercial insurance rates around the globe will remain, with further declines likely.

Subscribe for free and receive weekly Artemis email updates

Sign up for our regular free email newsletter and ensure you never miss any of the news from Artemis.

← Older Article

Newer Article →