U.S. primary rates increase in Q3, some ILS funds will benefit

Both U.S. commercial and U.S. personal business lines saw rates increase, on average, during the third-quarter of 2017, which could have an increasing benefit for insurance-linked securities (ILS) funds that now participate in primary, largely catastrophe exposed, underwriting business.

MarketScout’s third-quarter 2017 U.S. commercial and U.S. personal lines insurance analysis reveals average rate increases in the third-quarter of 2017, with commercial lines being up by an average of 1%, and personal lines increasing by an average of 2%.

ILS funds are increasingly gaining access to catastrophe exposed primary business lines, as they look to access risks more directly and improve efficiency, while stimulating returns outside of the very competitive U.S. property catastrophe space. ILS capital from certain funds is  increasingly accessing excess & surplus (E&S) business lines, which also saw rate increases in Q3, 2017.

The further and deeper ILS funds expand to gain access to risk from closer to the original source, the increasing impact rates in primary lines can have. So as the influence on certain ILS funds returns moved beyond reinsurance, these funds can benefit by being able to access rates that have increased prior to when they hit the traditional reinsurance cycle.

All of this suggests ILS funds stand to benefit from direct primary rate increases, which could actually be faster to realise than any uptick in reinsurance rates, with the absence of needing to wait for renewals.

Commenting on U.S. commercial rate movements in the third-quarter of 2017, MarketScout Chief Executive Officer (CEO), Richard Kerr, said; “Rates are trading on a quarter-to-quarter basis in a very tight range. The market seems to be seeking a direction but with no real impetus, except for the property market, to go one way or the other.

“The recent hurricanes have not impacted property rates for the third quarter; however, adjustments in property rates will be recognised in the fourth quarter of 2017.”

Broken down by coverage class, MarketScout reveals that commercial property, BOP, general liability, umbrella/excess, professional liability, D&O liability, and EPLI lines all increased by an average of 1% in the period.

While the workers’ compensation fell by 2%, and commercial auto increased by 5%, during the third-quarter of 2017.

Surety, crime, fiduciary, inland marine, and business interruption all remained flat in the quarter.

By industry class, energy remained flat in Q3, while transportation increased by an average of 5%, contracting 2%, and manufacturing, service, habitational, and public entity all recorded 1% average rate increases.

Discussing personal lines, Kerr said; “The impact of recent hurricanes has not been reflected in the third quarter rates. We expect fourth quarter 2017 rates will move based upon the ultimate insured losses, which are still largely unknown.

“We are closely monitoring the losses in the Caribbean and Puerto Rico. The ultimate total insured loss will impact rates in the mainland U.S. Caribbean and Puerto Rican insurers are different from those on the mainland U.S; however, the reinsurance markets are often the same.”

MarketScout explains that personal lines homeowners with a value under $1 million, increased by an average of 3% in the quarter, will homeowners with a value of more than $1 million increased by 2%.

Automobile also increased by 2% in the third-quarter, while personal articles increased by an average of 1%.