The persistent trend of intense competition and excess capacity across the global reinsurance sector, resulting in a softening environment for reinsurers and primary players, has seen 2015 become a “more aggressive repeat” of 2014 for the U.S. commercial property market.
The prolonged, benign catastrophe loss period witnessed across the insurance and reinsurance sector in recent times is continuing to impact an ever-softening industry, according to Duncan Ellis, Marsh’s U.S. Property Practice Leader.
Exacerbated by the influx of alternative and traditional sources of reinsurance capacity and resulting fierce competition, predictions for a mild Atlantic hurricane season imply more of the same in the coming months.
“Now if that prediction turns out to be accurate, 2015 will be a more aggressive repeat of 2014, which was a very good year for property buyers who single to lower double-digit percentage rate decreases,” said Ellis.
Ellis explained that during the first quarter of 2015, generally, U.S. commercial property rates experienced modest rate decreases, following the trend of the closing months of 2014.
However, after April 1st, 2015, that trend “accelerated dramatically” and the market is now “routinely seeing average property rates with double-digit percentage declines,” notes Ellis.
As traditional reinsurers, and increasingly providers of non-traditional sourced capacity continue to deploy capital into primary lines, U.S. commercial property business included, offsetting the impacts of a challenging catastrophe reinsurance market, it’s likely players in the space will continue to experience pressure on rates and stern competition.
Ellis echoed this point, saying; “We anticipate this continued decline to persist until a major catastrophic event, and or a drastic reduction in capacity occurs. What will cause this change, if it all, is the big question.
“For now, capacity remains abundant and new capital is poised to enter the market in late 2015 and 2016. That said, earthquake, named windstorm, and flood capacity have increased since January 1st.
“However 100 year special flood hazard areas and California earthquake are still the most limiting factors in determining the amount of total capacity a market is willing to provide on a risk.”
New capacity from ILS funds, investors and other alternative capital providers, is destined to impact the market for commercial insurance risks increasingly over the coming months. New initiatives to access commercial risks, program service providers and innovative ILS managers are all targeting the space, suggesting that a period of prolonged softening may be ahead.