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New & alternative capital to pressure commercial insurance rates in 2014: Willis


Commercial insurance buyers will face improved market conditions, with rates set to improve in many lines, thanks to the increased availability of insurance and reinsurance capital from alternative sources, broker facilities and new markets such as China, according to broker Willis.

Willis’ semi-annual Marketplace Realities 2014 report, published yesterday, looks at the rate trajectory for buyers of commercial insurance over the next year with particular focus on upcoming 2014 renewals.

The report suggests that the influence of alternative reinsurance capital, from markets such as insurance–linked securities (ILS), catastrophe bonds and collateralized reinsurance, is spreading with rate effects likely to be felt more widely. Add to this the additional influence of new capital sourced from broker facilities, such as the Aon – Berkshire Hathaway sidecar and Willis’ own 360 facility, as well as new capital from locations such as China, and the pressure across insurance renewals is going to increase.

Declining rates in property lines of business is almost guaranteed at the renewals next year, with alternative capital and the availability of cheaper reinsurance alternatives a key factor. Willis expects the availability of capital will affect other lines of business, easing recent upwards pressure.

Willis expects property insurance rates to fall an average of 10% to 12% for non-catastrophe exposed risks, while risks exposed to catastrophes such as hurricanes will decrease between 5% and 10%. The Sandy effect seems to be lingering here, keeping catastrophe exposed lines up a little higher. We have to wonder whether that will continue at the mid-year 2014 renewals if the U.S. remains hurricane loss free this year?

Downward pressure is being driven by the influx of alternative capital flowing into the insurance and reinsurance industry, particularly into the property catastrophe sector.

Commercial casualty lines of business will see better renewals, says Willis, with upward rate movement in the single digit percent range expected and some higher rate hikes in states such as California. This is because the influence of alternative capital has not yet expanded meaningfully into the casualty arena. With many ILS and capital providers now actively looking into this space as well, it has to be considered that downward pressure may appear on casualty lines later next year if meaningful ways to deploy alternative capital into casualty risks can be established.

Overall, Willis experts say that 14 insurance lines will likely see rate increases at renewals, while eight will see decreases. However, in many cases, the expected level of rate increase is moderating, and in some cases, predictions from Willis’ report last spring have now reversed.

Willis expects rate increases in Casualty insurance lines, including Workers’ Compensation and Auto, Employee Benefits, Cyber, Executive Risks, Crime/Fidelity, Health Care Professional, Construction, Kidnap & Ransom, Political Risk and Terrorism. Meanwhile, rates are expected to fall in Property lines, Errors & Omissions, Aerospace, Energy, Environmental, Marine, Surety and Trade Credit.

Eric Joost, Chief Operating Officer of Willis North America commented on the fact that not everyone has welcomed alternative capital into the market. “The reaction has not been all positive, to say the least, especially with respect to the new sources of capital. Some of this represents some real innovation – in an industry often criticized for conservatism and a lack of innovative progress. From our perspective we see clear benefits to these new vehicles, because our perspective is really that of our clients. For our clients – insurance buyers – the increase in supply of capital makes a more inviting marketplace.”

Joost continued, explaining that from a brokers perspective this trend is good for clients; “From our perspective, we see clear benefits to these new vehicles, because our perspective is really that of our clients. For our clients – insurance buyers – the increase in supply of capital makes a more inviting marketplace. These vehicles also offer administrative advantages and claim handling benefits through their simplicity. But at the same time, we too have been wondering what this all will mean in the long run. Is this new capacity a game changer or not?”

Interestingly, Willis’ senior management recently debated the impacts of alternative capital and held a vote on whether it would be a game-changer in the market. The consensus was yes, the influx of new and alternative capital in a variety of vehicles and forms will change the insurance and reinsurance game going forwards.

Joost wrote regarding this internal debate and vote; “The yea’s contend that the increase in supply will indeed lower the price of insurance and reinsurance. Insurers could find their costs dropping – over time – as much as 20% and the freeing up of insurer capital tends to have a pronounced softening effect on the market. The yeas also point out that the source – and motivation – of some of this new capital is different in nature from what we usually see. Institutional investors now entering the insurance world are looking for long-term results. Their perspective could spell a long-lasting impact. The nays, on the other hand, note that for the most part, the new sources of capacity have been with us before, though perhaps not in such quantity. Time will tell if the yeas in fact have it right.”

Willis believes that the advent of big data has helped to bring new capital to the market right now, with improved risk engineering and greater visibility of risk and return. The improved ability to quantify risks allows capital providers to justify new ventures, wrote Joost in the report.

The report paints what some insurers and reinsurers may see as a gloomy picture, but it really shouldn’t come as a surprise to anyone as the trajectory of rates has been reasonably clear to see for the last six months or more.

As alternative capital continues to enter the sector, it is expected that a good deal more capital from third-party investors will enter the reinsurance market in time for the January renewals, the pressure on commercial insurance rates looks set to grow while the market remains relatively loss free.

You can download the report from Willis via its press release.

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