The outlook for property and casualty (P&C) insurance and as a result reinsurance pricing over the next 12 to 18 months is bleak, according to Moody’s, with a general environment of flat to down pricing with pressure particularly on commercial lines.
While the insurance and reinsurance market is searching for the bottom of the pricing cycle, many observers feel that a slow decline in rate adequacy is likely to continue for the foreseeable future, while no events or dislocations occur to change the market outlook.
Rating agency Moody’s Investors Service holds this view, at least with respect to P&C insurance pricing, which it expects to be either flat or down over the next year and a half. As a result it’s likely safe to assume a similar continued pressure on reinsurance lines over the same period.
Moody’s foresees the most pressure on P&C insurance being on the commercial lines in North America. Property P&C lines are expected to continue to decline by single digits or higher over the next 18 months, reflecting the high competition in this market and the overspill of reinsurance capacity into primary property lines and the growing interest shown by alternative capital and insurance-linked securities (ILS) players.
North American casualty lines are expected to be flat to up by low single digits, according to Moody’s. Of course any sign of rate improvements could well be seen off by the increasing interest and expansion into casualty risks by large global insurance and reinsurance players, seeking to divert capacity away from saturated property or catastrophe exposed lines.
For Europe, the expectation is for rates to be flat overall, with Germany, France and Spain expected to be up by low single digits, while other countries could be flat to slightly down.
Asia is expected to see largely flat rates, with some modest increases in some of the faster growing economies in the region. Some other bright spots may be found in Japanese markets, where earthquake and fire insurance rates are expected to rise again, but this will likely be soaked up by local market players.
Meanwhile, Latin America is expected to see broadly flat rates and pricing, with underwriting initiatives expected by Moody’s to be offset by local and international competition seeking to deploy more capacity into this market.
At the same time investment income for insurers is expected to be largely flat, with some regions seeing declines due to continued interest rate pressure.
On the other side combined ratios are expected to be maintained at recent levels, although some markets in Europe and Latin America could look closer to break-even with 95% to 105% combined ratios the norm.
Of course all of this is only going to increase the pressure on insurers and reinsurers to continue to rationalise their reinsurance spending, as they seek to retain more premium and reduce costs. Maintain the pressure to find scale and diversification through a merger or acquisition. And, of course, keep the pressure on expense ratios and costs.
Efficiency, a watchword for the last two years or more, is going to continue to be the mantra for many a senior insurance or reinsurance executive, while the most forward-thinking will look to innovation, technology, new business lines, risks such as cyber and of course establishing how they can leverage third-party capital for growth and expansion, without cannibalising their existing profits.
Despite the negative pressure on pricing and rates Moody’s actually has a more stable outlook for P&C insurers than it does for live insurers, who also face the added pressure of a continued difficult investment climate and interest rate environment.
So while the P&C insurance (and reinsurance) sector will continue to face pressures, from high levels of traditional capital, low levels of losses, continued growth and competition from alternative capital providers, as well as pressure on the cost of their products due to innovation and disruption to the value-chain, there remains an expectation of reasonably stable performance, while large losses remain absent.
Also positive is an expectation that, even in the most saturated P&C market of the U.S., there will still be premium growth opportunities across all regions of the world. That should result in some additional demand for reinsurance capacity as premium volumes continue to increase.
One final point for the next 12 to 18 months on the P&C market, is that Moody’s expects that while reserve releases will likely remain positive, it does expect them to dwindle. A lower level of reserves are expected to be available for release over the next year and a half, which could show up any companies which have not been prudent or who have released reserves too quickly over recent years.
This is especially the case for North American and European re/insurance companies, where the reserve cushion is expected to begin to decline. As returns on equity remain vital for shareholders, any reduction in the contribution made by reserves, in an environment where pricing remains flat, could become evident very quickly.
So more of the same expected for P&C insurance, which will result in more of the same for reinsurance. The pressure to evolve, innovate, embrace new sources of efficient capital and to find ways to outperform peers will continue. And all the while the market will continue to watch for the bottom of the pricing cycle to emerge. When that happens is currently anyone’s guess.