Gibson’s Property & Casualty Practice Leader Mark Wobbe shares his insight and wisdom on what 2016 may bring for the property & casualty market.
Where is today’s property & casualty (P&C) market and where is it headed in 2016?
According to the Insurance Service Office’s (ISO) industry 6-month 2015 results:
- Insurer net written premium growth remained at 4.1%, same as 2015.
- Insurers’ combined ratio fell 1.3 percentage points in the first-half of 2015 to 97.6%.
- Policyholder surplus also fell from a record high of $675.2 billion in 2014 to $672.4 billion yet is still above any pre-2014 levels.
What does this mean in 2016 and what can insurance consumers expect from the marketplace?
In commercial P&C, rate decreases began to appear consistently throughout 2015 across most lines of insurance. It is expected this trend will generally continue in 2016. The question is whether intense price competition will emerge leading to significant rate decreases in most areas, or whether other market forces will keep this intensity in check.
At the macro level, global reinsurance capital grew to record levels in recent years, new and alternative capital flooded into the industry, especially an influx of new capital from non-traditional sources into the reinsurance market. Policyholder surplus rose to record levels for U.S. insurers, which have benefitted from rate increases in recent years. However, there are contradictory forces at play: capital is accumulating faster than the demand for insurance while investment results continue to generate low returns 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 2016. Both ratings’ agencies agree insurer margins are compressing and near-term earnings will be challenged. Performance will likely move to break-even underwriting results; however, policyholder surplus levels will remain strong.
What does all of this mean to a commercial P&C insurance program? For more detail, by line of coverage, here’s what’s likely to happen:
- Emerging Risks
- Workers’ Compensation
- Property
- General Liability and Automobile
- Umbrella & Excess Liability
- Directors’ & Officers’ and Employment Practices Liability
- Cyber Risk
- Construction
- Terrorism
- Mergers & Acquisitions
Emerging Risks
The use of technology by non-employee criminals to perpetrate crimes against organizations has increased dramatically. Most schemes can be characterized as impersonations of a vendor or senior manager. The insurance industry is referring to this phenomenon as social engineering fraud. Despite national press coverage, these frauds are increasing at alarming pace. Commercial crime policies are beginning to address the exposure with new coverage grants; however, terms are conservative and vary widely from carrier to carrier.
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 explore new ways to provide insurance solutions for certain emerging risks such as has been seen with cyber and terrorism. However, other emerging risks such as climate change, pandemic disease, emerging technologies, reputation/brand damage, workplace violence, and talent & skill shortages likely will not be completely addressed by insurance. Organizations will look to other risk management techniques to transfer or mitigate exposures in these areas.
Workers’ Compensation
With the rate increases achieved over the past few years and with increased demand of higher payroll levels in the economic recovery, many carriers’ combined ratios continue to improve. However, underwriters remain somewhat skeptical about workers’ comp. Although frequency of claims has generally been improving, there are still pockets of severity. Medical inflation is also challenging insurers. Some states remain extremely demanding such as Illinois, California, Pennsylvania, and New York. California workers’ comp premiums now represent 27% of the total U.S. market, significantly impacting the industry.
Many industry analysts believe the Affordable Care Act will put upward pressure on medical costs in the workers’ comp system. They also see costs being driven by comorbidities and prescription medications, particularly opioid pain killers. Legislative initiatives and case law also continue to impact the workers’ comp system.
With state-specific appetites, a continued lack of monoline workers’ compensation capacity, and challenges in the excess workers’ comp and self-insured arenas, underwriters will continue to pursue rate increases in certain jurisdictions and when loss experience warrants. In others, however, when an employer presents with favorable loss experience there could be rate reductions in the -5% range.
Property
Leading into 2015, property rates had been softening for several quarters. This trend continues and is expected to remain throughout 2016. Increased capacity, favorable reinsurance terms, and relatively low catastrophe-related losses support soft market conditions. Rate decreases could be as high as double-digit percentage change in some cases. However, there are always exceptions. CAT-exposed property on the Atlantic and Gulf coastlines and habitational risks will likely remain difficult to place and subject to rate increases. Unprotected commercial structures with high fire loads, such as wood & lumber-related businesses, will also likely not benefit from the soft rate conditions.
Big data is playing a big role. CAT-modeling has been utilized for some time now. Newer predictive models are being utilized by carriers and reinsurers to mine data with precision to determine what risks they want to write and where they want to write it.
General Liability and Automobile
Insurers continue to redefine their appetites for liability exposures with some expanding their appetites for higher-risk product liability exposures. From a pricing standpoint, general liability is now somewhat of a buyer’s market. Most industry analysts are predicting rate changes in the flat to -10% range in 2016. Loss histories and severity loss potential will be closely underwritten.
On automobile, fleet size matters. Large fleets, heavy trucks, livery exposures, and loss experience will continue to be carefully underwritten. Pricing will be far more conservative in these areas. Smaller fleets with good loss experience will see better terms. Physical damage loss costs have outpaced rate levels primarily due to the amount of late model vehicles on the road and newer technologies such as rearview cameras and park assist. Most carriers are increasing automobile rates, especially the physical damage component, and this will likely persist through 2016. Overall, rate changes could be in the flat to +7% range.
Umbrella & Excess Liability
There is abundant capacity for additional layers of liability protection through umbrella or excess policies. Some marketplace disruption has occurred resulting in slightly fewer participants due to carrier M&A activity. Clients with clean loss history and in industries underwriters view as favorable could see price decreases in 2016 as much as -10%. Those with large fleets, heavy trucks, or poor loss experience could see more restrictive terms from underwriters. Overall, like the conditions with general liability it’s a buyer’s market.
Directors’ & Officers’ And Employment Practices Liability
In the D&O line, private companies and not-for-profits generally will see upward pressure on premiums, although some “best in class” may see rate decreases for first time in several years. Pricing, although mostly firming, varies widely depending on industry, merger & acquisition activity, and the 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, Supreme Court decisions, and intensified regulatory activity.
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 could be forced to choose between a familiar, experienced incumbent 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 specific industries like restaurants, hospitality, financial institutions, and health care present challenges. Exposures continue to evolve with social media, wage & hour claims - watch closely proposed amendments to FLSA and the DOL’s guidance on independent contractor determination, the EEOC’s systemic discrimination initiative, 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 +10% on mid-size employers and +5% to +15% on small employers.
Cyber Risk
Breaches have become a “not if, but when” phenomena for organizations of all sizes. The headlines in 2015 included monumental data breaches at major health insurers like Anthem and government agencies like the Office of Personnel Management and the IRS. In addition to theft of data, hazards range from routine vandalism hacking to orchestrated terrorism. Insuring these exposures is a significant growth opportunity for insurance carriers, as take-up rates increase. Businesses of all sizes are now buying the coverage. Pricing the risk is a challenge for carriers as there is not yet much actuarial data. Nonetheless more carriers continue to introduce products to the marketplace. With this increased supply, first-time buyers can expect favorable terms.
“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. 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 security breaches.
Construction
Although not a line of coverage, but rather an industry sector, construction is increasingly viewed by underwriters as a specialty area. Construction activity in the U.S. continued to rise in 2015. There is a broader base to the type, size, and scope of projects underway. Construction defect exposures and difficult legal environments in certain states have created pockets of disruption for both the general liability and workers’ compensation lines. Overall, there is competition among underwriters for construction programs.
The market remains competitive and there is likely no end to this in 2016. Workers’ comp pricing decreases slightly for “best in class” clients, and, otherwise, rates could be flat. Workers’ comp varies greatly by jurisdiction with more conservative underwriting in areas with unique issues such as Illinois and New York. General liability will likely be flat, and automobile will lead with rate increases for the same reasons as discussed earlier. Umbrella/excess could see upward price pressures, although there is plenty of capacity in the lead $25 million range.
Terrorism
Congress extended the Terrorism Risk Insurance Act (TRIA) through 2020. This was significant because without a federal backstop, substantial market dislocation would likely occur with terrorism coverage in large urban markets becoming unavailable, and large employers in dense population centers would likely see a reduction in the number of insurers willing to write their workers’ compensation. The stand-alone terrorism insurance market continues to create alternatives to TRIA. The evolution of these coverage programs includes not only the traditional property lines but also cyber-related and political risk-related insurance. For further details on terrorism, take a look at our What Is Commercial Terrorism Insurance? blog.
Mergers & Acquisitions
Significant M&A activity emerged by mid-year 2015 in the P&C industry. The most notable was the acquisition of Chubb by ACE in a $28.3 billion deal. Other deals generally involved specialty insurers like Japan’s Tokio Marine’s acquisition of HCC and China’s Fosun’s acquisition of Ironshore. Many experts believe the industry’s M&A trend will continue into 2016. Low investment returns and fierce pricing competition, combined with new and alternative capital and less expensive reinsurance, create a situation where P&C carriers struggle to grow profits fast enough to satisfy investors. Deploying capital to complete an M&A deal is a likely path some carriers will travel in 2016.
