Commercial P&C insurance rate deceleration expected to continue

The rate trajectory of commercial property and casualty (P&C) insurance rates in the U.S. continued to be positive in September, with rates actually rising faster than in August. But analysts suggest that overall a deceleration of P&C rates will continue.

The MarketScout monthly commercial insurance barometer, which looks at year-on-year rate movements across commercial P&C insurance in the U.S., reports that rates still increased by 1.5% on average in September, which is slightly up on the 1% seen in August but the same as seen a month before in July.

Analysts at Keefe, Bruyette & Woods say that they expect rate increases in commercial P&C insurance will continue to weaken and that they are not confident that rates will remain positive in Q4 2014, as the industry continues to adjust and come to terms with the entry of new capital into the insurance and reinsurance space.

And so the impact of the over-capitalised traditional re/insurance market and the entry of alternative reinsurance capital is expected to continue to spread more widely. With an expectation that by the end of the year rates will no longer be driving margin for insurers, as commercial lines rate momentum slows, the pressure affecting some traditional players in the reinsurance market may also begin to affect insurance market participants as well.

This is important to note as some of the larger reinsurance market players are also deploying capacity into insurance lines of business and some of the commercial property and specialty lines are particularly in their sights.

If you look at the second derivative change that MarketScout reports, which shows the difference between the most recent month’s change, of 1.5%, and the y/y change a year earlier, it shows September as being down 3.5%. In fact, on this measure it shows every month of this year reflecting decelerating rates in the commercial P&C space.

Commercial insurance rate barometer, second derivative - Source: MarketScout, KBW Research

The KBW analysts explain:

Commercial lines rate increase momentum has been slowing but remains in positive territory. We expect continued rate deceleration over the next few months. We’re neutral on primary commercial insurers as meaningful underwriting margin improvement is unlikely until rates exceed the combination of rising loss costs and diminishing favorable reserve development. We are not confident that rates will remain positive in 4Q14 as the industry continues to adjust to an influx of new capital.

As these commercial insurance lines continue to see decelerating rates, perhaps turning to negative later in the year, this market may begin to experience softening which could stimulate a demand for lower-cost, more efficient reinsurance and risk capital among insurers.

That could position ILS players well to become trusted parties in the provision of risk capital to insurers in this space, providing lower cost capital to help rate impacted commercial P&C insurers continue to grow.

Interestingly, a new study from Towers Watson shows that P&C insurers expect to be putting capital to work over the next year or two in mergers and acquisitions, development of new products, investment in new data and analytics or even share buybacks and returns of capital to shareholders.

That is exactly where the reinsurance sector has been for the last year or so and perhaps shows that the way excess and new capital has affected the reinsurance market is set to affect insurers in very similar ways.

Also read:

– Commercial P&C insurance rate increases slowing, may turn negative.

– Commercial P&C insurance pricing slides, led by commercial property.

This situation was forecast by a number of parties, including broker Willis Group which said in 2013 that new & alternative capital would pressure commercial insurance rates in 2014.