The trajectory of commercial property and casualty (P&C) insurance rates in the U.S. continues to be upwards, but rate increases have slowed dramatically coming in at a 1% year-on-year increase in August and may turn to negative later this year.
The latest MarketScout monthly commercial insurance barometer, which looks at year-on-year rate movements across commercial P&C insurance in the U.S. has seen a consistent slowing of the rate of increase since earlier this year. The rate of increase has dropped by half a percent in one month, having come in at 1.5% in July, so this rate of deceleration could see rate s decreasing year-on-year by the end of 2014.
Rate increase momentum was in the 2% to 3% range at the end of 2013 but began to slow in May, according to analysts at Keefe, Bruyette & Woods. Given the rapid rate of deceleration, the KBW analysts believe that this could turn to rate decreases later in the year.
Analysts at KBW suggest that the influence of alternative reinsurance capital is one factor affecting commercial P&C insurance rates, demonstrating the broad reach that the growth of insurance-linked securities and third-party reinsurance capital is having on the insurance and reinsurance sector.
“We expect rate increases to continue to weaken in the coming months and are not confident that rates will remain positive in 2H14 as the industry continues to adjust to an influx of new capital,” the KBW analysts wrote in a report.
As the reinsurance market has continued to soften and the softening trend has widened to affect more classes of reinsurance business, that softness is cascading down to the primary insurance market. The glut of capital available in the insurance and reinsurance market shows no sign of shrinking, in fact further growth is the most likely trend we will see, large catastrophe events aside.
KBW’s analysts explain; “We expect rate increases to continue to weaken in the coming months and are not confident that rates will remain positive in 2H14 as the industry continues to adjust to an influx of new capital.”
Richard Kerr, CEO of MarketScout agrees that a soft commercial insurance market could be ahead; “Insurers really don’t want to enter another era of rate declines; but in order to hold business, most of the market is being forced to moderate pricing. If this trend continues, we should see annual rate declines very soon.”
ILS investment managers have begun to provide some capital to primary players in certain deals and it will be interesting to see whether this continues to happen. As ILS managers look to access insurance-linked returns, one way of doing so is as a capital provider via reinsurance to primary players.
If commercial insurance markets begin to soften properly we could see lower-cost, more efficient capital in demand among insurers. That could benefit ILS players who are looking to provide more risk capital at costs that traditional reinsurers struggle to compete with.
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.