Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Alternative capital keeps commercial property rates more stable: WTW


The influence of the capital markets on insurance and reinsurance is helping to keep rates stable across the commercial property sector, as inflows of ILS type capacity has helped to fundamentally change the supply curve, to the benefits of buyers.

In its latest report on the commercial property insurance sector, broker Willis Towers Watson (WTW) notes the influence of alternative capital and the fact that it is keeping the sector from hardening, even after the significant loss events of 2017 and now 2018 as well.

Joe Peiser, Head of North America broking at WTW, explained that “following the catastrophes of 2017” after which many were anticipating some kind of commercial insurance market firming, “the property market proved resilient, thanks to the stabilizing impact of alternative capital.”

He went on to say, “After the HIM (Harvey, Irma, Maria) trio of storms of 2017, the last believers in the old hard market/soft market cycle have likely stopped waiting for the loss events that will dramatically turn the market.

“The rise of alternative capital has changed the fundamental supply curve for catastrophe risks and perhaps more.”

As the industry comes to terms with two U.S. hurricane losses from Florence and Michael in 2018, on top of the catastrophe activity seen more broadly around the globe and particularly in Japan, it is the capital markets that once again are providing needed stability in rates for buyers.

“The availability of alternative capacity, which prevented the market hardening many predicted a year ago, remains a significant factor in absorbing these losses,” WTW explained.

Adding, “All of the alternative reinsurance capital that was lost in the 2017 major catastrophe events has now been replaced,” and this is becoming an increasingly important part of global re/insurance capital.

As a result, capacity for commercial and large property risks remains abundant and with start-ups looking to tap the capital markets to support underwriting portfolios of direct and facultative (D&F) property risks, as we covered here, there seems little reason to assume that the property market will see any contraction in available capacity and as a result concerted firming of rates.

“The influx of alternative capacity has created a more stable environment with less volatility following industry losses,” WTW explained.

The insurance and reinsurance market has been going through a period of consolidation, which has ramped up in recent months, but this isn’t expected to have a major effect on availability of capacity.

Historically, periods of merger & acquisition activity would result in a contraction of capacity in insurance and reinsurance markets, potentially fueling further increases in rates.

But WTW notes that this no longer appears to be the case, perhaps as any contraction in capacity can more quickly be filled with third-party investor sourced funding to provide continuity to clients.

Peiser said, “Recent M&A has not had a material impact on rates and capacity, but it is reducing the number of competitors in the field. Given the capital fluidity that is the industry’s “new normal,” we don’t foresee a dramatic impact on rates, but we do expect that consolidations will result in more underwriting discipline, which may serve as a backstop against another free fall in rates.”

But despite all of this, WTW does believe that some areas of commercial property are set for rate increases, as rates keep up with inflation and GDP growth at least in some areas.

In addition, loss affected programs will see rate increases as well, the broker believes.

WTW said that non-catastrophe-exposed property insurance programs are expected to see flat to +2.5% pricing, while catastrophe-exposed programs could see increases of 2.5% to 7.5%, and cat-exposed programs facing heavy loss activity could experience rate firming of 10% or even more.

So it’s not all doom and gloom, despite the general rate stability. If anything though, as well as stabilising the market, we’d suggest that alternative capital has helped it to become more rational, with rate firming only where it’s warranted and flatter rates across much of the rest of the commercial property space.

Is that better than the boom and bust, cycle driven approach to rate rises of the past? It certainly is for the buyers.

For more on commercial insurance pricing from WTW’s new report, including the expectation that escalating casualty losses may create broader rate firming, visit our sister publication Reinsurance News.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis ILS NYC 2023 - Insurance-linked securities conference in New York City

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.