Global insurance rates lower, alternative capital a factor: Marsh

Abundant insurance and reinsurance market capacity, assisted by the influx of alternative capital, coupled with a lack of large loss events, has contributed to a decline in global insurance rates for the ninth quarter running, according to analysts at Marsh.

“Competitive market conditions, characterised by an abundance of global capacity and a lack of large insured loss activity resulting in reported improved underwriting results with favourable combined ratios, helped account for the ninth consecutive quarter of rate decreases,” noted Marsh.

Commercial insurance rates decreased in various geographies and across the majority of large business lines during the second-quarter of 2015, as the competitive market environment continues to challenge firms’ profitability.

Insurance Renewal Rate Change Ranges by Region and Line of Business Q2 2015 - Source: Marsh Global Analytics

With pricing in the global property catastrophe reinsurance market remaining pressured owing to a lack of major loss events, a glut of capital and heightened competition, reinsurance market participants are increasingly seeking to access the returns of primary business lines.

As a result, notes Marsh; “Surplus levels typically remained at or near record levels, helping to drive the competitive marketplace during the second quarter. Alternative capital continues to flow into the industry and is creating an additional source of risk transfer, fuelling competition, and helping to drive rates lower.”

The global insurance rate decline is perhaps best evidenced by Marsh’s own insurance rate index, which clearly shows how rates have declined over nine consecutive quarters since the start of 2013.

Marsh Global Insurance Index - Source: Marsh Global Analytics

Marsh Global Industry Specialties and Placement leader, Dean Klisura, also commented on the abundance of capital; “While there are some insurers exiting certain lines of business, overall market capacity remained abundant during the quarter. Aiding the market’s overall capacity has been the willingness of companies to consider capacity outside their regional geographies. This strengthens the global nature of the marketplace.”

The observation from Marsh regarding the inflow of alternative capital in the global commercial property and casualty (P&C) space isn’t surprising, with other industry analysts, including MarketScout and Keefe, Bruyette & Woods (KBW), noting the pressures on primary lines’ rates in recent times has been exacerbated by the flood of third-party reinsurance capital entering the sector.

Furthermore, the benign catastrophe loss trend, which exacerbates the surplus of capacity, has continued, “helping drive insurer profitability and removing near-term catalysts for increased rates,” notes marsh.

Underlining this point, Bowring Marsh Chief Executive Officer (CEO), Andrew Chester said; “Capacity in the international marketplace remains abundant and, in certain cases, there is an oversubscription of capacity for limits being purchased, both of which continue to drive a reduction in rates and provide additional limits of coverage.”

Continuing to warn that it “is anticipated that, unless there is a major catastrophe in the region, the next 12 months will continue to bring favourable market conditions for clients.”

Despite the negative market commentary and outlook surrounding Global commercial P&C rates in Marsh’s Q2 2015 ‘Global Insurance Market Quarterly Briefing,’ emerging, specialty and niche business lines can offer market players with an additional, diversified source of revenue, should they be willing and able to take on the risk.

Marsh highlights this, stating that while rate decreases were experienced across most major business lines, “notable exceptions were seen in specialised coverages led by a firming cyber insurance market.”

And it’s in areas of new, underdeveloped, emerging, large-scale risks, like cyber and terrorism, that the wealth of traditional and alternative sources of reinsurance capacity will likely prove essential.

“There are newer, emerging risks such as cyber that are creating a need for additional insurance and risk transfer solutions. Given the importance of cyber risk going forward, we will be keeping a close eye on its impact to the overall market environment,” said Marsh.

Over time the development of modelling capabilities, resulting in a greater understanding of emerging risks, like cyber, will lead to an ability to adequately and efficiently price such risks. And as the coverage of new risks matures and investor confidence and appetite grows, the abundance of alternative capital could be utilised for cyber, terror, and so on, risk transfer solutions.

Not only would this help to provide necessary capacity to cover huge, emerging risks, but it would also remove some of the capital pressure from the global re/insurance market, which in turn would limit the amount of surplus capital filtering down into primary lines, helping commercial P&C rates return to more desirable levels.

While capital remains greater than the opportunities to deploy it, the pressure will continue to be filtered through to insurance lines of business. Of course innovative ILS players are already looking at how to close the gaps between their capital and the primary insurance risk, which will in turn increase the pressure over years to come.

It seems that rates are destined to decline until they reach levels where the most efficient capital is no longer willing to reduce its prices any further. At that point the most efficient form of capital will set the price, allowing a floor to be established, as we have recently seen in some property catastrophe risk zones.