Chubb CEO Greenberg says P&C prices now cover loss cost trends

Property and casualty rates and pricing is finally back to covering loss cost trends, CEO of insurance giant Chubb Evan Greenberg said today during his firms earnings call.

Having reported Q1 results yesterday, Greenberg today took the opportunity to discuss the state of the market and it’s evident that the turn in rates seen in 2019 so far could greatly improved the potential profitability of underwritten risks.

Only a few months ago, in the Chubb annual report published in February, Greenberg bemoaned the fact that despite rising loss costs the industry was not allowing rate to keep pace.

“Frankly, our industry needs rate,” he said at the time.

Greenberg explained that as rates have been flat, or subdued, over an extended period, but at the same time natural catastrophe losses have been elevated, the revenue collected has failed to subsidize the “lousy” results seen for many insurers, which ultimately “create industry margin pressures,” he said.

“The industry needs rate, and pricing in the U.S. and many other markets has not been keeping pace with loss cost trends,” he reiterated in his February letter to shareholders.

He went on to say, “Loss costs rise every year, and if pricing remains flat or declines even modestly, loss ratios come under pressure. Rising loss costs across the industry, both casualty and property related, are pressuring loss ratios and impacting a number of important short–tail lines, such as homeowners and commercial property.”

But all this may have changed in just a matter of months, as Greenberg explained today during the Chubb earnings call that property and casualty pricing is now moving at around an equal rate to loss cost trends.

This is significant, not just for players such as Chubb, but also for the wider reinsurance market and of course the ILS funds and investors we are more focused on.

The ability of pricing to enable underwriters to cover their cost-of-capital, enterprise expenses and loss costs, has long been cited as a major issue for the sector, as rates dwindled away.

For some, with lower costs of capital or more efficient business models, rates did continue to meet loss costs for a long time beyond where traditional players, such as Chubb, began to highlight this as an issue. Some of the more efficient reinsurance strategies continue to feel that rates do cover their loss costs even today, although these are the more diversified and lower-volatility plays.

But overall, if the industry perception is that rates need to cover loss costs for large global players as well, that only bodes well for higher margins for a more efficient strategy, which translates into more flexibility for them when it comes to underwriting as well.

Greenberg implied that pricing is now as good as it has been for five years and that the increases seen by Chubb appear to be continuing to flow through.

Again, this bodes well for the reinsurance segment of the market, as sustained upwards rate pressure will no doubt flow through to benefit reinsurance and ILS markets at renewals.

Greenberg said in Chubb’s results statement that, “Commercial P&C net premiums in North America were up 5% in the quarter, and in our international operations premiums were up 6% in constant dollars.”

Explaining that as a result his firm took advantage of the “improved pricing environment,” which he explained as widespread.

“In U.S. commercial lines, London wholesale and certain other international markets, it is the best we have seen in a number of years,” he said.

During the earnings call today Greenberg implied that rate rises may be expanding further into the P&C market as well, saying that he sees the market as increasingly rational.

Analysts at KBW said that Greenberg’s commentary suggests that rates could be above loss cost trends in the months to come, which should deliver significant opportunities for growth at major insurers, that could also drive increased reinsurance purchasing further down the line as well.

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