U.S. commercial P&C soft market fears “simply overdone”: Bernstein

As overcapacity and competition in the traditional reinsurance space filters down into primary lines, resulting in persistent pressures on U.S. commercial property and casualty (P&C) rates, Bernstein claims soft market cycle fears might be “overdone.”

Investment research and management firm Bernstein, has published a brief report on the trends and discussions that took place during its 2^nd Annual Bernstein Financials Summit, in early March.

The report, titled “U.S. Insurance: Two Days, Three Themes, and Lots of New Ideas: What I learned at Bernstein’s Financials Summit,” notes that pressures on commercial P&C rates and managing a challenging reinsurance environment are a key focus and concern of global re/insurers.

After two days of discussions with executives in the commercial P&C space, Bernstein said; “We believe persistent fears of a classic soft cycle in commercial P&C are simply overdone, and even after three years of strong momentum, this implies there remains good value in quality P&C.”

Bernstein feels that following the last soft market the industry has matured and learnt from its mistakes, adopting a more stable stance than before.

Stressing that conversations that occurred during its two-day event “reinforced their view this time is different, and that the cycle is just not the critical feature of the market it once was.”

One of the main drivers for this change, according to Bernstein, is the advanced, industry wide adoption of enhanced technology, including new distribution models, prediction models and progressive pricing models, from the smaller players to the more dominant ones.

The final point here being of particular importance as typically the more aggressive, least well-operated competitor determines the cycle, which is usually the smaller, less productive firms, confirmed Bernstein.

But the fact that even the smaller companies now have access to a wide range of software and tools to better manage their books, “has an outsized impact on moderating the cycle,” explains Bernstein.

“While it may be true that ‘humans never change,’ systems and tools do, and it is this industry wide upgrade of legacy systems which have allowed firms to pull their data forward and follow the data, rather than follow the cycle,” continued Bernstein.

Artemis has discussed the softening of U.S. commercial P&C rates over the last few months, including reports from MarketScout that reveal during February rates actually increased by 1%, compared with a flat January.

MarketScout said that it believes that the bounce in rates in February could be an aberration, being related to a push-back from some underwriters as they refuse to continue to lower prices, a dynamic that could become interesting in months to come.

Only time will tell if Bernstein’s optimistic view on U.S. commercial P&C rates, and the wider market cycle, becomes a reality or not.

But it is clear that the current soft P&C trend is amplified by the challenging conditions in the global reinsurance sector, another theme that Bernstein says was at the forefront of discussions at its recent Financials Summit.

Examining the international reinsurance space, Bernstein said; “As the environment gets more difficult, this once comfortable industry has become decidedly more competitive, and firms’ leadership have begun to struggle with the question of the very survival of their franchise.”

An abundance of alternative or third-party reinsurance capital continues to flood the traditional reinsurance space; ensuring pricing continues to fall for all in the industry.

But what Bernstein noticed after conversations at its event was how firms were adopting a vast array of techniques and approaches in order to mitigate the impact of tough market conditions.

“We’ve seen some folks try to get bigger, some to get smaller. Some want to buy retro, others want to sell it. Most want to manage new alternative capital, but there are some who seem happy simply to use it.

“And then there are those who focus on investing low-cost float, who hope they can stay small focus on niches and structured treaties to side-stepping the risk of the emerging soft market,” declared the investment research and management organisation.

From what Bernstein reports it seems apparent that firms are focused on navigating the challenging reinsurance market in a way that suits their business needs and model, where this can be achieved at least.

As market consolidation continues, most recently with Endurance’s announced takeover of Montpelier Re, and sector participants consider how to best make use of all the alternative and traditional capital, the market will continue to reshape and evolve.

But as more and more third-party and traditional reinsurance capital gets put to work, globally, this should alleviate some of the resulting pressures on U.S. commercial P&C rates.