Cat rates could rise 25%, but “eager” alternative capital may dampen: Willis

Catastrophe exposed property insurance pricing is expected to rise anywhere from 10% to as much as 25%, depending on whether accounts faced losses during the recent hurricane events, but “still eager” alternative capital providers may dampen the upward pressure on rates, broker Willis Towers Watson said.

In the brokers latest Marketplace Realities report on the property & casualty market, Willis Towers Watson (WTW) said that it forecasts steep rate increases of up to 25% on catastrophe exposed property business.

Standard catastrophe exposed property business is expected to see rate rises of between 10% and 20%, while the loss affected accounts are expected to face the steepest rate rises of up to 25%.

WTW believes that commercial insurance buyers will face rate increases as the insurance and reinsurance sector comes to terms with the financially damaging hurricane season.

“For those underwriters who need to dip into capital to fund their losses, the pressure to raise rates to replenish that capital could be unyielding. For buyers, this may mean the long soft market for commercial property insurance could be over, at least temporarily, and there may be upward pressure on rates in other lines of insurance,” the broker explains.

WTW staff said that they “expect to see some type of market correction” in the property market, after the catastrophes hit the sector with the largest losses in years.

However, despite forecasting these high rate increases, WTW notes that there remains considerable uncertainty when trying to forecast price movements for 2018.

A number of factors could dampen commercial property insurance rate rises, WTW says, even for the catastrophe and loss hit accounts.

Chief among those factors are, “till-abundant capacity and what experts view as “still eager” alternative capital providers” WTW explains.

Even non-catastrophe property insurance rates are expected to rise around 5%, WTW says, so with these levels of price increase on the horizon it would be no surprise to see this “still eager” alternative capital target them.

With a number of ILS fund managers underwriting primary insurance risks, from commercial and E&S property to catastrophe exposed residential business now the ILS market and its alternative reinsurance capital is already accessing these specific areas of the market.

There is also a growing flow of traditional capacity targeting these areas of property insurance through MGA structures, as well as the capacity from major reinsurance firms that also targets commercial insurance business as a way to secure higher margins closer to the source of the risk.

Hence there seems every possibility that rate increase forecasts turn out to be overdone, once we get through to 2018 and the levels of capacity and capital available to underwriters becomes clearer.

Joseph Peiser, Head of Broking at WTW North America, said that the prospect of rising rates could encourage fresh capital to come into the reinsurance and insurance industry, providing the potential for a dampening of rate increases.

On the other hand, he also noted that should rates not tick up by a significant amount it is also possible that investors find the sector loses some of its lustre.

WTW said that it will provide an update on the property insurance market’s prospects once there is more visibility available into pricing factors.