Despite the fact that rate declines are expected to slow down at the January 2017 renewals and beyond, for the insurance and reinsurance market 2017 is likely to be even more challenging than the year we’ve just seen, according to Kroll Bond Rating Agency (KBRA).
2016 has seen reinsurance market pressure reach a peak, as the excess levels of traditional reinsurer capital and continuing to grow levels of alternative and ILS sourced capital, weighed on a market that has not faced particularly severe losses, where investments are not contributing to profits and where competition is consistently rising.
While the market believes it is nearing a pricing floor, at least in the most under pressure property and catastrophe risks, the outlook is not really improving and for traditional companies it is anticipated that 2017 may be even more difficult to turn a healthy profit.
KBRA said that the property and casualty insurance industry will “essentially break even” for the year 2016, with average combined ratio for the sector ending the year around 100.
This has been driven by the highest insured catastrophe loss year since 2012, but also the very high level of non-catastrophe and severe weather losses, combined with an expectation that reserve releases will continue to diminish across most lines, rate increases trailing losses in some lines like auto and a need for significant increases in asbestos and environmental liability reserves, according to Kroll.
But looking ahead, things are not expected to get any easier in U.S. P&C insurance and similarly the reinsurance market will also face continued difficulties in 2017, with the ability to profit becoming harder for some companies.
KBRA says that if 2016 can be considered challenging in property & casualty re/insurance, 2017 will likely be more so.
A difficult pricing environment is likely to persist in most areas and the bottoming out of some areas will be little solace for companies that are already finding underwriting failing to meet their cost of capital.
Pricing in most lines, aside from some areas of auto, are expected to continue to decline in 2017, which suggests that even if reinsurance rate declines do moderate they are likely to continue.
“Commercial lines, reinsurance and catastrophe reinsurance are all expected to see low single- digit rate decreases,” KBRA explains, saying that brokers suggest more lines will see decreases than increases in 2017.
Competition from alternative capital is also likely to remain high and perhaps increase, exacerbating the effects of a market already becoming less profitable for some incumbents. Additionally the expansion of ILS funds and alternative capital into primary markets will continue and expand, spreading the pressure and ultimately bringing more price pressure to bear.
It’s not the most encouraging outlook for traditional players and it seems that traditional re/insurers have to get used to a prolonged period of lower returns on equity (ROE).
Of course the longer this continues the larger and more dramatic the cause of any reversal will have to be, making that reversal of fortunes less likely and enabling the traditional business model to recover.
2017 looks set to be a year when traditional companies will have to make choices between becoming increasingly less profitable, or embracing change and adopting elements of more efficient business models, lower-cost underwriting capacity, technology and more direct distribution practices.
That suggests another year of change and evolution of insurance and reinsurance business models, which of course will make 2017 another fascinating year to be a part of this marketplace.