Moderating forces that contributed to long soft market may return: WTW

There is an  expectation that the commercial property insurance marketplace could begin to slow down around the middle of the year as some of the forces that had driven recent softening return, according to Willis Towers Watson.

Among these are competition and reinsurance capital, including alternative capital from the insurance-linked securities (ILS) market.

These were key factors in the extended period of softening insurance and reinsurance rates from 2012 right through to around 2018 when things began to reverse to a degree after the significant U.S. catastrophe losses.

While commercial insurance rates continue to accelerate so far in 2020 and property is one of the segments gaining rate all the time, insurance and reinsurance broker Willis Towers Watson feels this is likely to moderate around the mid-year renewals.

Reporting on the fourth-quarter of 2019 commercial insurance market, WTW says that rates were up in double-digits for commercial property, with mid-market and larger accounts the ones experiencing the steepest increases.

But this may not continue endlessly and WTW believes the market will find a level in the coming months, driven by those familiar softening factors.

“We predict that rate hikes and capacity constrictions will continue throughout 2020 and likely into 2021. However, we expect a more orderly market to emerge by mid-2020, especially for property,” Joseph C. Peiser, Global Head of Broking at Willis Towers Watson explained.

Adding, “By that point, the bulk of the re-underwriting by some major property insurers should be largely complete. Pricing will most likely continue to rise as insurers seek profitability, but those increases and market capacity for most risks should be more predictable than they have been during the past two quarters.”

Peiser and WTW believes that the challenges that have helped to push commercial rates higher will be overcome and chief among these is competition and capacity to support property and catastrophe business, including that from the ILS marketplace.

“As the market seeks a new equilibrium, there are reasons for optimism: the alternative capital market is showing some renewed enthusiasm for the reinsurance market after a year or so of tepid interest, the overall industry has more capital than ever, insolvencies are a rarity, InsurTech companies seem to have largely abandoned their bad-boy disruptor image and are now working with insurance market participants to improve the client experience by helping us all be smarter, cheaper and faster, and the inexorable laws of supply and demand still apply to our industry. This challenging market will not last forever,” he said.

While insurance carriers will certainly be keen to support property rates and it’s likely reinsurance carriers and ILS funds will have less desire to push rates down in the aftermath of recent catastrophe loss years, a moderation is expected.

“The moderating forces that contributed to the long soft marketplace of recent years could well return,” Peiser believes.

Further explaining that, “One of those forces is competition. While we have witnessed unprecedented global market discipline with no renegade players, we do not expect that to last beyond 2020.”

“Another force is alternative capital. In the wake of two big cat years in 2017 and 2018, some observers assumed that investors in instruments like ILS (insurance-linked securities) would get cold feet and flee,” Peiser continued.

“However, alternative capital is not going away. It’s not even retreating to any great extent. Many institutional ILS investors are in it for the long term. There are pockets of interest in the investor community to increase stakes in the property reinsurance industry, given the rising rates. When supply goes up in the reinsurance market, eventually the news is good for insurance buyers as we’ve seen in the past. Moreover, as modeling capabilities get ever more sophisticated, the ability of the market to profitably underwrite this short-tail line increases — even in the face of systemic climate risk.”

It will be interesting to see how this moderating effect takes hold and whether it results in any softening, or just a new pricing floor being established based on the appetite of traditional reinsurers and alternative capital players.

The hope will be that weight of capacity pressure does not exert itself too strongly on property insurance and reinsurance too quickly this time, giving a better chance that rates remain commensurate with the risks that the capacity is taking on.