Re/insurance rate pressure may be greater than forecast in 2016: PwC

Insurance and reinsurance players in the London market are facing further “significant” price declines in 2016 and 1 in 4 may have to rely on their investment returns to make a profit, as recent market conditions look set to erode profitability, according to PwC.

It’s the latest negative outlook for the insurance and reinsurance sector in 2016, with the general expectation in all quarters now set that further challenges are ahead and conditions, while perhaps slightly less severe, are unlikely to be easier.

“Underwriting confidence within the London insurance market continues to decline at an alarming rate,” global consultancy and accounting specialists PwC found following its review of 2016 underwriting expectations, which comprised analysis and discussion with over 30 London market participants.

PwC’s research showed that a number of London market players are expecting further price pressure “of greater than 10% across some lines.” However, despite this expectation PwC believes that executives are not reflecting this in their planned combined ratios for 2016, “influenced by recent market profitability and the desire to avoid plans which imply a strategy of cashflow underwriting.”

The pressure on combined ratios, which could increase as lower pricing flows through in 2016, is resulting in the need for 1 in 4 London market re/insurers to rely on their investment returns in order to be profitable.

Unless they’ve been living under a rock in recent years, readers will be aware that this is a challenge in itself, with investment returns depressed and interest rates low. That raises the spectre of insurers needing to take on more risk in order to make a sufficient investment return, which has been reflected in greater use of alternatives. It also makes the hybrid, or investment oriented re/insurance model seem more attractive in this environment where underwriting alone is unlikely to remain profitable.

PwC explains that London players are, on average, assuming a net combined ratio of 98% for 2016. Adjusting for planned investment returns, with which they hope to drive at least some profitability, the average net combined ratio drops from 98% to 95%. PwC explains that this demonstrates “the limited benefit of cashflow underwriting in the current economic climate.”

PwC’s research found that some market participants expect “significant risk-adjusted premium rate reductions anticipated across most classes in 2016.” The current view of the market is that last year’s double digit declines are going to be compounded by rate declines of -7% to -9% across the property reinsurance and energy lines of business.

PwC warns that it has “Observed a tendency within the market over recent years to underestimate rate changes in the current soft market. If this continues, we may see another year of double digit risk-adjusted rate reductions across property and energy lines.”

Energy has seen particularly steep declines in 2015, despite a number of large losses, with -15% or greater declines on a risk adjusted basis for property related covers, both onshore and offshore. In other areas of offshore energy the rate reductions have been steeper, at around -30%, thanks to the impact of low oil prices and reduced drilling activity.

Talk of rates “bottoming out” for property reinsurance in 2015 may have been premature, PwC notes, suggesting that there is further for rates to fall in the property reinsurance sector in London. That could translate into other markets, such as Bermuda we’d imagine, suggesting that the pressure on underwriting there continue at similar levels to in London.

PwC also notes that the trend for re/insurers to redeploy capital into casualty and other lines, to avoid the pressure in property catastrophe reinsurance and energy lines, is set to continue in 2016. This despite an expectation in the London market of rate reductions around the -7% level across casualty reinsurance lines in 2016.

Harjit Saini, London Market director who led PwC’s review, commented; “(Re)insurer confidence and the general outlook in the London Market has been hit by year-on-year rate reductions in the property reinsurance and energy classes since 2013.

“The cumulative effect of these reductions, combined with the anticipated risk adjusted rate reductions for 2016, imply that following 2016 renewals, on average (re)insurers will have cut premiums by 30% since 2013.

“Anecdotal evidence suggests the actual outcomes in 2016 may be worse than expected. Underwriting discipline on new business tends to be weaker than on renewals in a soft market and therefore the true economic view may be worse.

“Consequently, many insurers in these sectors are reliant on good risk selection to make a profit on underwriting in 2016.”

Jerome Kirk, London Market actuarial leader at PwC, concluded; “It is clear we are in the depths of a soft cycle when an average year will see a loss for many, the pace of rate softening increasing, broker facilities commonplace and questions raised on casualty reserves.

“Recent claims experience has been anything but average and actual returns remain strong, meaning the insurance industry, and London Market in particular, remains an attractive investment for new capital.

“In these conditions, (re)insurers will need to adapt to survive. Making the right decisions, whether strategic or individual risk selections, are fundamental and holding your nerve imperative. The path to success is increasingly based on sound data, insight and analytics which are fast becoming the key differentiators.

“At a recent seminar I asked attendees where they thought they were in the insurance cycle and “depression, despondency and desperation” were the most common responses but there was mention of “hope”. I think that says it all.”

So another forecast suggests that the rate pressures in reinsurance are set to continue and could actually be a little worse than others have predicted. The outlook for the January renewals across the entire market is for ongoing challenges.

Read more of our reinsurance renewal season coverage here.