7 min read

2015 Marketplace Outlook

Jan 19, 2015 6:30:00 AM

2015_Marketplace_OutlookWhere is today’s property & casualty market and where is it headed in 2015? According to the Insurance Service Office’s (ISO) industry 6-month 2014 results:

  • Insurer net written premium growth slowed to 4% from 4.3% in the first-half of 2013.
  • Commercial lines insurers’ combined ratio rose 1.8 percentage points in the first-half of 2014 to 95.4%.
  • Policyholder surplus rose 9.5% in first-half 2014 keeping it at record levels.

What does this mean in 2015 and what can insurance consumers expect from the marketplace?

It appears rate increases will continue to taper-off in some areas and rate decreases will emerge in others. The question is whether intense price competition will emerge leading to significant rate decreases in most areas.

At the macro level, global reinsurance capital is at record levels, capital is flooding into the industry, especially an influx of new capital from non-traditional sources into the reinsurance market, and policyholder surplus is at record levels for U.S. insurers - which have benefitted from rate increases in recent years.

However, there are contradictory forces at play. Although rate increases are tapering-off, capital is accumulating faster than the demand for insurance while investment returns continue to weaken for insurers as their maturing investments are being reinvested at lower yields.

Moody’s and Fitch have both issued “stable” outlooks for the industry for 2015. Both ratings’ agencies agree insurer margins are likely compressing and that earnings will likely decline over 2015. However, they foresee rates softening further throughout 2015.

Here’s a look at what’s likely to happen by line of coverage:

Emerging Risks

Insurance only addresses a portion of risks faced in today’s world let alone the emerging risks that threaten organizations. The P&C industry will continue to deploy capital to provide insurance solutions for certain emerging risks such as cyber-attacks and terrorism. However, other emerging risks such as climate change, pandemic disease, emerging technology, workplace violence, and talent & skill shortages likely will not be addressed by insurance. Organizations will look to other forms of risk management to protect, transfer, or mitigate their exposures in these areas.

Terrorism

The Terrorism Risk Insurance Act (TRIA) expired December 31, 2014 when a Senate reauthorization vote failed. After a few setbacks, a bill to extend the program for six years was approved in January 2015, with some adjustments.

The changes will be phased in throughout the life of the program. The major changes include:

  • An increase in the trigger level from $100 million to $200 million
  • Insurer co-pay is increasing from 15% to 20%, and
  • Increases to post-event recoupment. This allows the government to recoup losses over time by means of policy surcharges. 

Without a federal backstop, significant market dislocation would be likely particularly in densely populated urban centers. In the absence of TRIA’s protection, coverage for Terrorism would become more costly and the workers’ compensation marketplace would be strained for capacity. Large employers in dense population centers would likely see a significant reduction in the number of insurers willing to write their workers’ compensation and premiums will increase significantly, as underwriters tried to price for risk previously reinsured by the federal backstop.

Cyber Risk

Breaches are becoming alarmingly common and range from routine vandalism hacking to orchestrated terrorism. The marketplace continues to evolve in its offerings for cyber as both the number and type of new entrants increase and change what’s available. “Turn-key” solutions have become popular whereby the cyber insurance policy provides coverage along with value-added services that have been packaged by the insurer. These services include I.T. forensics, incident response specialists, specialized public relations and legal counsel with cyber-event expertise. Pricing has become more competitive overall but underwriters are seeking to increase premiums and retentions as they attempt to stratify their books. First-time buyers are likely to continue to find a competitive market yet one that is slightly less robust than in recent quarters. Experience is illustrating the degree of risk with point-of-sale retailers leading the way as the worst risk class. Underwriters are closely watching the Payment Card Industry (PCI) as well as other phenomena such as “hacktivism,” cyber extortion, and physical damage triggered by an I.T. security breaches.

Workers’ Compensation

With the rate increases achieved over the past few years, many carriers’ combined ratios have stopped deteriorating. However, underwriters remain skeptical about workers’ compensation. Although frequency of claims has generally been improving there are still pockets of severity and medical inflation that are challenging insurers. Also, some states remain extremely challenging such as Illinois, New York, Pennsylvania, and California. On the other hand, there are several states where 2015 rate filings represent an overall rate decrease from 2014 rate levels.

Many industry analysts believe that the Affordable Care Act will put upward pressure on medical costs in the workers’ compensation system. They also see costs being driven by comorbidities and prescription medications, particularly pain killers.

With state-specific appetites, a continued lack of monoline workers’ compensation capacity, and challenges in the excess workers’ comp and self-insured arenas, we expect underwriters to continue to pursue rate increases in certain jurisdictions. In others, however, when an employer presents with favorable loss experience there could be rate reductions in the -5% range.

Property

Rates have been softening for several quarters, and there does not seem to be an end to this trend in near sight. Capacity, favorable reinsurance, and relatively low catastrophe-related losses support soft market conditions. There are always exceptions, however. CAT-exposed property on the Atlantic and Gulf coastlines and habitational risks will likely remain difficult to place and subject to rate increases.

Big data also plays a role. Property losses are certain and swift, e.g., they either did or didn’t happen and they’re resolved quickly, unlike mass tort litigation, class action lawsuits, and lifetime medical benefits in certain workers’ compensation jurisdictions. Carriers and reinsurers are using big data with precision to determine what and where they want to write property.

General Liability and Automobile

Insurers continue to redefine their appetites for liability exposures with some expanding their appetites for higher-risk product liability exposures and some still seeking rate increases. However, there appears to be an easing of pricing pressure in primary casualty lines overall. Although capacity is abundant, underwriters are somewhat cautious in certain situations. Some predict rate changing from -10% to +10% range in 2015. Loss histories and severity loss potential will be closely underwritten. On automobile, large fleets, heavy trucks, livery exposures, and loss experience will continue to be underwritten closely. Pricing will be more conservative in these areas.

Umbrella & Excess Liability

There is also abundant capacity for additional layers of liability protection through umbrella or excess policies. Some underwriters are looking to raise their attachment points to avoid losses and others are aggressively pursuing market share in this space. Clients with clean loss history and in industries underwriters view as favorable could see pricing decrease in 2015. Those with large fleets, heavy trucks, or poor loss experience will see underwriters continue to require higher attachment points.

Directors’ & Officers’ Liability and Employment Practices Liability

Private companies and not-for-profits will likely continue to see upward pressure on premiums, although some may see rate decreases for first time in several years. Pricing varies widely depending on:

  • industry - life sciences, healthcare, manufacturing, financial institutions, etc.
  • merger & acquisition activity
  • life-cycle stage - a venture-backed, early-stage company versus a successful, multi-generational, tightly-held business

Underwriters continue to monitor developments with cyber-attacks, antitrust/unfair business practices, defense cost inflation, and Supreme Court decisions impacting D&O insurance.

The price-firming momentum of recent years may dissipate slightly. Private company D&O buyers could see renewal rates between flat to +10%. The market has gained newer entrants that are gaining momentum. Private companies, therefore, could be forced to choose between a familiar, experienced insurance advisor looking to increase price and retentions and an untested, unproven new entrant offering a lower premium.

In the EPL arena, certain jurisdictions like California and certain industries like restaurants, hospitality, and healthcare present challenges. Exposures continue to evolve with social media, wage & hour claims, an expansion of EEOC oversight, pregnancy-related accommodations, lesbian/gay/bisexual/transgender protection under Title VII, and international claims. Expect underwriters to seek to increase retentions and offer rates in the range of flat to as much as +15% in some instances.

Construction

Not a line of coverage but an industry sector, construction is viewed by underwriters as somewhat of a specialty area. Construction activity in the U.S. continued to rise in 2014. Construction defect exposures and difficult legal environments in certain states have created pockets of disruption for both the general liability and workers’ compensation lines.

Workers’ compensation pricing will continue to moderately firm as will general liability. Rates could decrease slightly for “best in class” clients and, in general, rate increases could be in the single-digit range. While incumbent carriers will continue to push for rate on their renewals, they will likely be pressured by competitors seeking to write new business.

Gibson

Written by Gibson

Gibson is a firm of advisors and consultants that help clients get to the proactive side of insurance. We specialize in working with companies looking to find their edge—where they are growing as an organization, differentiating themselves in the marketplace, and preparing for current and future risk. Together we will find the perfect combination of insurance and consulting.