Australian primary company Insurance Australia Group (IAG) is pushing for rate rises, raising its commercial insurance product pricing as it seeks to wield its influence in response to the market pressure created by excess insurance and reinsurance capital.
It’s more typical to hear of insurers wanting to raise prices due to losses suffered, from major natural catastrophes or casualty liability events, but in this case IAG is responding to market forces that have resulted in consecutive years of price declines.
The commercial insurance marketplace, particularly property and catastrophe exposed areas of the market, have come under pressure in the last few years as capital levels in insurance and reinsurance markets have expanded.
As reinsurance first came under pressure, due to the inflow of third-party capital from insurance-linked securities (ILS) funds and capital market investors as well as the lack of major losses which left traditional reinsurers awash with cash, commercial insurance soon followed.
Large, global reinsurance firms have been increasingly pushing into commercial property insurance markets, while companies such as Warren Buffett’s Berkshire Hathaway have also diverted capacity towards primary lines.
The overflow of capital and capacity from reinsurance markets into insurance is clearly now being felt, with reports of commercial prices dropping over recent years. IAG is feeling the effects and intends to respond with price rises, as it feels that rates are dropping too low.
Fighting back against competitive forces with price increases is perhaps unintuitive, as in most industries that could seal your fate as the competition continue to undercut you. But in insurance and reinsurance markets there has historically been a joint effort to raise rates, which the Australian market will likely see, given the domination of a few larger players there.
So IAG’s strategy might succeed. The commercial property market might respond by raising their own rates, in line with any increases IAG pushes through. The question then is whether the large global reinsurers will also support those increases, or whether they can maintain lower pricing in their specialist large account commercial and corporate insurance deals.
If they can, then IAG and others might find they need to maintain the lower rates in some areas, or even pull-back from some pieces of the commercial market. That could be a bit of a coup for large reinsurance firms, as this is one area of the market they could dominate if they can wield their diversification to sustain lower pricing for longer.
At the same time alternative capital from ILS funds is also gradually targeting commercial property lines in catastrophe exposed regions of the world, through relationships with MGA’s and fronting companies. The Australian market should expect to feel the effects of this, even through the trend is unfolding in the U.S. first.
During their earnings presentations last week, IAG explained the “tough” commercial insurance market conditions, saying that the firm managed to remain profitable despite a soft commercial insurance marketplace.
Lower rates in commercial insurance were being driven by increased competition, with the low pricing and tough conditions further evidence that the market is reaching the bottom of the cycle, IAG’s CEO Peter Harmer explained.
Harmer said that the bottom of the market price cycle is now “much clearer”, adding that IAG has pushed through some price increases where it can and is pleased with the pricing discipline shown by most market players.
He cited pricing pressure as being driven by capital inflows into insurance and reinsurance, with the knock-on effects being most severely felt in commercial lines in the primary markets.
The current price environment is the softest he has seen in his career in re/insurance, Harmer explained, adding that it is a function of the availability of capital which has been pressuring global insurance and reinsurance rates.
Harmer said that IAG has pushed through mid-single digit rate increases across most of its property portfolio, but added that this has resulted in a shrinking of the portfolio as new business volumes have shrunk as a result.
That’s one of the risks for IAG, that it pushes through rate rises and others, such as global reinsurers, take the opportunity to increase their direct writing of insurance risks in Australia. Or perhaps one of the larger ILS fund managers could strike a deal in Australia to access risk more directly, providing risk capital to reinsurer portfolios of commercial property business.
That could ramp the pressure up further for IAG, as it finds itself a more expensive option in the market, beaten to business by more efficient capital providers which can sustain the lower pricing for longer.
Harmer said that IAG is now seeing its competitors also raising prices in the region, on commercial risks, but this is still no guarantee that its strategy of raising prices will win out.
With efficient capital in reinsurance increasing, large global players looking for new routes to risk, MGA’s and other intermediary service providers looking to directly harness sources of capital markets capacity, and technology providers and insurtech start-ups also looking to make re/insurance buying more efficient, it seems unlikely the pressure will let up soon.
Fighting back by raising prices could be a very good way to down-size the commercial property portfolio though, meaning IAG ends up with a book of loyal and repeat business.
But is this a strategy for the future?
Or will the increasing efficiency of risk capital mean that IAG is either forced to find ways to reduce its own cost-of-capital to compete (perhaps by leveraging more third-party capital itself), or to step away from segments of the market altogether?
These are questions that were asked of the U.S. property insurance market, but which have yet to be answered. The shake-out of insurance and reinsurance markets caused by the capital markets, ILS and efficient capital is still ongoing and the ramifications for large primary players like IAG will take time to fully manifest themselves.
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