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

Rate increases for commercial property & casualty insurance lines of business slowed to a decline in the second-quarter, according to data from the Council of Insurance Agents & Brokers, with commercial property large account business leading the way.

It’s no surprise to see that large account commercial property insurance business in the U.S. is feeling the effects of reinsurance market softening and the influence of additional and alternative capacity that may now be focused on these risks. In the second-quarter the CIAB survey shows that commercial property prices declined by an average of -2.6% while large account commercial insurance rates declined by the same.

Across the whole commercial P&C insurance market the result is negative for the first time in a few years, with the average rate decline reaching -0.5% across all lines and sizes of account. Large commercial property accounts saw the biggest fall in insurance pricing during the quarter, followed by business interruption and construction lines.

The large commercial property insurance accounts will be facing increasing competition as some reinsurance groups channel more capacity back into primary business in an effort to offset the declining catastrophe reinsurance market. For this reason it is expected that these commercial insurance lines could see additional pressure over the coming quarters, particularly as the direction of insurance pricing can tend to trail the direction of reinsurance pricing by a quarter or more.

“The commercial market continued along the same path as it traveled in the first quarter,” commented Ken A. Crerar, president/CEO of The CIAB. “Pricing responded predictably to strong competition and plenty of capacity to underwrite most commercial lines. As for the second half of the year, it will depend on the usual factors – catastrophe losses, profitability and capacity”

With catastrophe losses remaining below average and capacity and competition seemingly at all-time highs the outlook for commercial insurance pricing remains uncertain. The commercial property insurance space could see prolonged softening if the trend for large re/insurance groups to refocus capacity on this market continues. The additional capacity this provides could result in a number of quarters with flat to declining prices, while catastrophe losses remain low.

The CIAB provides some anecdotal quotes from market participants which demonstrate that competition is being felt in the commercial P&C insurance market.

A broker from the U.S. Northeast said; “The trend of more competitive underwriting continued, especially with new business.” From the Midwest it was reported that; “New business became more competitive with very possible premium reductions for an average to good account.” In the Southwest, a broker responded; “Pricing is becoming noticeably more competitive on all account sizes.”

Property is the biggest faller, with catastrophe risks here becoming attractive to the large re/insurance groups which are looking outside of catastrophe reinsurance for catastrophe risk returns. Catastrophe risks in commercial insurance lines are also beginning to become attractive to insurance-linked securities (ILS) managers and some are actively looking at ways to deploy reinsurance capital into that sector in order to help insurers grow and tap an indirect share of the returns of this market.

A Northeast-based broker cited that; “The property market was very soft with lots of capacity.” Reports from the Southwest also suggest a “softening” market. A broker from the Northeast also said there was an abundance of capacity for catastrophe risks.

Capacity and competition in the commercial property insurance market is likely to continue to rise, with the property catastrophe reinsurance market increasingly looking like a place some large re/insurance groups want to avoid at this time. The need to redeploy capital is placing more emphasis on commercial insurance markets adding to the high levels of capacity and capital targeting this sector.

For large insurers with commercial focus the emphasis will likely be on growing their books and the market in the current environment. For smaller insurers who feel the competition the most the market conditions may continue to become increasingly difficult, especially if the overflow of excess capital from the reinsurance market continues.

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