Flat commercial U.S. P&C insurance rates signal 2015 soft market

Commercial property and casualty (P&C) insurance rates could turn negative in 2015 after December saw flat year-on-year rate increases, bringing an end to the positive but decelerating rate hikes seen in November (1% y/y) and throughout last year.

MarketScout’s latest monthly commercial insurance barometer, which studies year-on-year rate movements across commercial P&C insurance in the states, reveals that rate increases were flat in December, leading MarketScout’s Chief Executive Officer (CEO), Richard Kerr to advise that; “We are on the cusp of a soft market.”

A general deceleration of rates across the U.S. P&C sector has been apparent since December 2013, as the insurance and reinsurance industry continues to adapt to its well-capitalised state. The lower cost of reinsurance capacity and availability of low-cost ILS and alternative reinsurance capital has exacerbated softening trends across insurance and reinsurance, particularly in sectors where reinsurers can often look to deploy excess capacity, or where reinsurance pricing trends are reducing costs for P&C insurers.

As the impact of heightened competition among reinsurers and rising levels of alternative reinsurance capital continues to widen its reach, the resulting pressures on U.S. commercial P&C rates start to take on a more prevalent, negative form.

In October last year Artemis discussed that analyst at MarketScout and Keefe, Bruyette & Woods (KBW) predicted continued softening of rates, and doubted that rates would remain positive at the end of 2014.

And while rates failed to turn negative in Q4 2014, “the composite P&C rate slowly drifted towards renewing as expiring and in December we finally hit the mark,” explained Kerr of MarketScout.

In a recent report utilizing MarketScout’s monthly commercial insurance barometer, analysts at KBW again stressed their stance on U.S. P&C rates; “We expect continued rate deceleration over the next few months. We’re pretty neutral on primary commercial insurers, as sustained underwriting margin improvement is unlikely with rate increases matching or trailing loss trends, especially if reserve development fades further.”

That KBW and MarketScout predict continued market softening in the coming months, with the potential for rates to turn negative soon, comes as no surprise. Competition is expected to remain ripe and the excess capital status of the reinsurance market, along with further inflows of alternative capital, show no immediate sign of stopping. So absent a major catastrophe it’s likely the softening trend will continue to trickle down from various reinsurance business lines, further impacting the primary insurance market.

So while it’s clear that commercial U.S. P&C rates are continuing to soften, no one can be sure when the market will actually turn soft. Kerr expands on this point; “The next soft market will start as soon as a composite rate decrease is measured. We expect the beginning of the next soft market cycle to be in early 2015.”

Also read:

– Commercial P&C insurance rate deceleration expected to continue.

– Commercial P&C insurance rate increases slowing, may turn negative.

– Commercial P&C insurance pricing slides, led by commercial property.

This situation was forecast by a number of parties, including broker Willis Group which said as long ago as 2013 that new & alternative capital would pressure commercial insurance rates in 2014.