An “underwriting driven” hard market: Gallagher

The current market environment is not a traditional hard market, according to insurance and reinsurance broking, risk management and servicing group Arthur J. Gallagher, as this is an “underwriting driven” hard market, where carriers are being forced to ensure they can deliver a profit from their underwriting sides going forwards.

That’s one of the best explanations for why this hard market has crystalised and received so much support from all sides.

It’s not about payback. It’s not even really about the losses that have been seen.

It is about profit and the very sustainability of many insurance and reinsurance business models going forwards.

Gallagher’s latest U.S. Market Conditions Report for this autumn examines property and casualty market conditions and concludes that the driver for this hard market is profit.

“In a traditional hard market, capital and consequently capacity are reduced, limiting the availability of insurance,” the company explains.

“But this marketplace is driven by the need for underwriters to make a profit underwriting versus relying on investment income.”

Gallagher believes that a number of factors have come together to help drive this hard market:

• A spike in large weather-related loss events/catastrophes.
• Historically low interest rates.
• Industry-wide rapid increases in Liability losses.
• Increases in the frequency and severity of ransomware claims.
• The global pandemic and resulting economic uncertainty.

But, again, at its core, the hard market is not about recovering lost revenue, it’s about setting profitability baselines that make the business modes in the insurance and reinsurance industry more sustainable.

We’ve been saying for a while that rather than just hiking rates in reaction to loss activity, the industry needs to get better at pricing risks in a manner where they can be underwritten sustainably over the cycle.

It helps no-one, least the policyholder, when capacity exits market segments when they become unprofitable for it.

This hard market sees carriers trying to recalibrate their pricing, as well as the terms on which they deploy their underwriting capital. Which should result in a better and more sustainable environment, albeit at higher pricing benchmarks.

“Carriers remain intensely focused on underwriting discipline, ensuring they secure the right terms and pricing on certain lines of coverage that have historically not performed from an underwriting standpoint,” Gallagher explains.

Gallagher notes that the reinsurance market is hardening as well as the P&C insurance sector its report is more focused on, meaning that on top of the global pandemic and economic fallout, make this a time of high uncertainty for insurance carriers in the U.S.

“This uncertainty is contributing to the feeling that this is a time — not unlike in the wake of 9/11 — where the market has entered into a new phase of recalibration. Many would call this recalibration a hard market in the U.S.,” the company said.

So, this “underwriting-driven marketplace” that we find ourselves in, is something Gallagher expects to persist.

“The pace of the United States’ economic recovery and the outcome of the active hurricane season could alter some of the underlying fundamentals of the current marketplace. However, in all likelihood, the conditions that exist today are not changing anytime soon, and it will take carriers several quarters of re-underwriting their books of business to overcome the challenges associated with the current marketplace,” Gallagher believes.

Which means that, “All market indications point to a continuation of premium increases for the balance of the year and throughout 2021.”

Indications look particularly good in property insurance, for example, where Gallagher cites a stat that 89% of its insurance clients reported paying a property rate increase, which it says is the highest number recorded since the early 2000’s.

With expectations that U.S. property insurance rates will rise well into 2021, perhaps beyond, the expectation will be that reinsurance rates will also continue to stay firm, or rise further at the mid-year 2021 reinsurance renewals.

Gallagher also revealed that its large national property clients, in particular those with a total insurable value of greater than $150 million, saw average rate increases at 22% in the second-quarter of this year.

Changes in terms and conditions are called “significant”, particularly increasing deductibles, shrinking sublimits and conservative deployment of limit in catastrophe exposed regions.

While at the same time, the company also cites continued escalation of losses from non-peak perils such as severe convective storms as another driver of growing losses and therefore providing further impetus for hardening of rates.

It’s certainly not a traditional hard market in P&C insurance and the longer this push for profits persists, the more likely it is reinsurance firming will persist too.

Of course, reinsurance firming also reduces profits for insurance carriers, through higher costing protection. All of which goes some way to suggest the hard market may have more legs than many before it, if this focus on profit and sustainable business models continues.