Extended hardening market expected in U.S. commercial insurance: WTW

Commercial insurance buyers are now facing the prospects of an extended hardening market thanks to the pandemic, as well as new pressures on contract terms and conditions, Willis Towers Watson said today.

The insurance and reinsurance broker explained that persistent upward pricing pressure will be seen across most lines of business in North American commercial insurance, with “a newfound scrutiny of their coverage terms and conditions” set to compound the challenged insurance buyers are facing.

Also exacerbating the commercial insurance market situation is the fact that rates had been outpacing reinsurance market price movements, but in some areas reinsurance rates may now accelerate past primary, making capacity a potential issue for commercial insurers in future as well.

Those direct commercial carriers that are reliant on reinsurance may also look to alternatives at this time, while some carriers and their commercial clients have shown a renewed, or heightened interest in solutions such as parametric coverage.

A new report from WTW looks at the challenges facing commercial lines insurers and insureds in the wake of the Covid-19 pandemic, noting that the decline in economic activity is likely to lead to large reductions in insurable values, but still no single line of business predicts overall rate decreases.

However, WTW explains that in many lines of commercial insurance, “the ultimate impact of COVID-19 and the economic downturn remains to be seen.”

“The pandemic and economic downturn will very likely extend the hard market through 2021, with market discipline continuing as insurers’ losses materialize and their investment income deteriorates,” commented Joe Peiser, global head of Broking, Willis Towers Watson.

“While we expect pressure on coverage to last for the foreseeable future, mainly due to significant policy language disparities brought into focus by the inconsistent language addressing pandemics, the good news is the insurance industry is solvent, well capitalized and positioned to deliver.”

This hardening for longer commercial insurance market is going to be met by hardening reinsurance rates as well.

However, there may be opportunities here for efficient capital to support programs underwriting commercial property business, particularly the catastrophe exposed and the improvements in rates are certain to prove attractive to those ILS fund managers that look to access primary sources of business further up the market chain.

WTW noted that underwriters are being accommodating for clients facing significant challenges at this time.

“We are seeing accommodations. This spirit is something we hope will last,” Peiser said.

He also highlighted the need for a government solution to the pandemic coverage and business interruption issue.

Saying, “Pandemic risk is different, and the exploration of solutions should be robust and involve all stakeholders, public and private. But let’s go one step further and include other systemic global challenges and priorities, such as climate change and cyber terrorism. We must learn from recent events and combine our collective experience to be better prepared for the next systemic global challenge.”

Looking ahead on the prospects for market pricing, Peiser explained that market conditions will certainly persist through the rest of this year.

“The pandemic and the resulting economic downturn will very likely extend the hard market through 2021. It may not expand it — rate increases for most lines may not increase further than they’ve been increasing for the past several months — but market discipline and upward rate pressure will continue as losses from the pandemic materialize and investment income deteriorates,” Peiser said.

On how the market is functioning he warned, “The global insurance market is operating. But there is considerable distraction and uncertainty. Underwriting decisions may take longer than expected. Allow ample time for renewals.”