Mark Wobbe, Principal at Gibson, shares his insight on what 2017 may bring for the property & casualty market. 
Where is today’s property & casualty (P&C) market and where is it headed in 2017?
According to the Insurance Service Office’s (ISO) industry 6-month 2016 results:
- Insurer net written premium growth was 3.0%, down from 4.1% for the same period in 2015.
- Insurers’ combined ratio increased 2.2 percentage points in the first-half of 2016 to 99.8%.
- Net investment income fell from $23.4 billion in 2015 to $22.1 billion in the first six months of 2016.
- Insured catastrophe losses increased from $10.7 billion in 2015 to $13.5 billion in the first half of 2016 – exceeding the $11.6 billion first-half average for the past decade.
- The industry produced a net underwriting loss of $1.5 billion – the first year-to-date net underwriting loss in over three years.
What does this mean in 2017 and what can businesses expect from the marketplace?
In commercial P&C, consistent rate decreases began to appear in 2015 across most lines of insurance, and this pattern continued throughout 2016, with the exception of commercial auto. It is expected that competitive pressures will continue in general in 2017. The question is whether the poor trends in results experienced by insurers, as mentioned above, in the first six months of 2016 continued through year-end, and, if so, will this slow down price competition in 2017.
Ratings agencies are split on the outlook. Moody’s again issued a “stable” outlook for the industry for 2017. The ratings’ agency believes insurer margins are compressing through pricing and investment headwinds. Performance will likely move from break-even to deteriorating underwriting results; however, policyholder surplus levels will remain strong. Fitch, on the other hand, changed its 2017 outlook for the U.S. property & casualty market from “stable” to “negative” reflecting earnings deterioration, competitive market conditions, and lower investment earnings.
What does all of this mean to a commercial P&C insurance program? Here’s a look at what’s likely to happen.* Click a topic from bullet pointed list to skip to that specific section.
- Emerging Risks
- Workers’ Compensation
- Property
- General Liability and Automobile
- Umbrella & Excess Liability
- Directors’ & Officers’ and Employment Practices Liability
- Cyber Risk
- Construction
- Mergers & Acquisitions
Emerging Risks
There continues to be an increase in fraud committed against organizations by non-employee criminals through the use of technology, email, and social media. This type of social engineering fraud has increased dramatically in recent years. Most schemes can be characterized as impersonations of a vendor or senior manager requesting wire transfers of funds. Despite national press coverage, these frauds continue to increase at an alarming pace. Some Commercial Crime policies now 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 risk, terrorism, and workplace violence. However, other emerging risks such as geopolitical risks, climate change, the sharing economy, emerging technologies, mass migration, reputation/brand damage, and talent & skill shortages likely will not be completely addressed by insurance. Organizations will need to look to other risk management techniques to prevent, transfer, or mitigate exposures in these areas.
Workers’ Compensation
Underwriting results in workers’ compensation began to improve in 2012, lifting the line out of one of its worst performing periods (i.e., 2007 – 2011) in over a decade. With the rate increases achieved over those years, and with increased demand (i.e., higher payroll levels), many carriers’ combined ratios improved. However, underwriters remain somewhat 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 Florida, Illinois, California, Pennsylvania, and New York. California workers’ compensation premiums now represent close to 30% of the total U.S. market significantly impacting the industry. In Florida, the workers’ comp market is in turmoil. A 14.3% rate increase was recommended to the state rating bureau in reaction to two Florida Supreme Court decisions in 2016 and the passage of a workers’ comp-related bill by the Florida legislature.
Many industry analysts wonder what changes to the Affordable Care Act will do – will it shift non-occupational claims to the workers’ comp system as exchanges close and health premium and care costs rise? Observers also see costs being driven by comorbidities and prescription medications, particularly opioid pain killers. In addition, legislative initiatives and case law in many states continue to impact the workers’ comp system.
With state-specific and industry-specific appetites, underwriters will continue to pursue modest rate increases in certain jurisdictions and when loss experience warrants. In more favorable states and for employers with excellent loss experience, there could be rate reductions in the -2.5% to -5% range.
Property
Property rates had been softening for several quarters, and the trend is expected to continue in 2017. Increased capacity from traditional sources as well as alternative market capital and favorable reinsurance terms have supported soft market conditions with rate decreases, with some in the low double-digit percentage range. However, there are exceptions and some headwinds in sight.
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, or large concentrations of values in locations lacking water supply and adequate fire department services may not benefit from the soft rate conditions. It’s possible the property reinsurance market has found its floor, and if 2017 produces an increase in CAT-related losses such as 2016 did, then underwriting may tighten and pricing may flatten-out or even begin to slightly increase.
Big data is also playing a 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, and to determine offerings (e.g., flood and earthquake limits; wind and hail deductibles; etc.).
General Liability and Automobile
One is favorable; the other is not. General liability insurers continue to redefine their appetites for liability exposures with some expanding and pursuing higher-risk product liability exposures. From a pricing standpoint, general liability continues to be a “buyer’s market.” Most industry analysts are predicting rate changes in the flat to -5% range in 2017. However, loss histories and severity loss potential will be closely underwritten.
Automobile, on the other hand, is an entirely different story. The industry in general is seeing deteriorating results with both increased frequency and severity. It is expected the rate increases seen in auto during 2016 will continue in 2017. Large fleets, heavy trucks, livery exposures, and unfavorable loss experience will continue to be conservatively underwritten with caution and priced accordingly. Smaller fleets with good loss experience will see better terms and rate increases in the low single-digit percentage range. In addition, emerging technologies are being watched closely by underwriters. Beyond the now common rearview cameras, GPS, and park assist systems, the future will likely include autonomous or self-driving vehicles. Most carriers will continue to increase automobile rates in 2017, especially the physical damage component. Overall, rate changes could be in the +2.5% to +10% range.
Umbrella & Excess Liability
Umbrella and excess remains soft with ample capacity and competitive pricing for the most part. Competition is the strongest in the excess position (i.e., layers above the lead umbrella). Some marketplace disruption has occurred resulting in slightly fewer participants due to carrier M&A activity and underwriting talent migrations. This is partially off-set by increased competition in the U.S. by the London markets (e.g., Lloyd’s), who compete aggressively for lead umbrella and excess layers in the U.S. Clients with clean loss histories and in industries underwriters view as favorable could continue to see price decreases in 2017. Those with large fleets, heavy trucks, unfavorable loss experience, and/or in certain high-hazard industries could see more restrictive terms from underwriters and higher premiums.
Directors’ & Officers’ And Employment Practices Liability
The D&O market is robust, and there are opportunities to find high value placements trading-off between coverage terms and price. Private companies and not-for-profits generally will see a stable market in 2017, although some “best in class” may see moderate rate decreases. Pricing and terms, however, can vary widely depending on industry (e.g., large health care, financial institutions, etc.), merger & acquisition activity, and life-cycle stage (e.g., a venture-backed, early-stage company versus a profitable, multi-generational, tightly-held business). Underwriters continue to monitor developments with cyber-attacks, antitrust/unfair business practices, defense cost inflation, Supreme Court decisions, Section 11 claims in state courts, securities class actions, and intensified regulatory activity.
Private company D&O buyers could see renewal rate changes between low single-digit decreases to +5%. The market has gained newer entrants who are gaining momentum. Private companies, therefore, 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. Not-for-profits will likely see slightly more conservative pricing from flat to +10%.
In the EPL arena, issues abound – social media, pay equity laws, the Equal Pay Pledge (a 2016 White House initiative), joint employer liability, DOL rulings, the Fair Labor Standards Act, employee classifications/independent contractors, and Wage & Hour claims. Certain jurisdictions like California, New York, and Massachusetts, and certain industries like restaurants, hospitality, staffing firms, and health care present challenges. The EEOC’s systemic discrimination initiative, pregnancy-related accommodations, Lesbian/Gay/Bisexual/Transgender protection under Title VII, and international claims layer-on additional exposures. Expect underwriters to increase retentions and seek rate increases in the range of flat to +15% depending on loss histories, turnover, and relative exposure to issues mentioned above.
Cyber Risk
The cyber risk or privacy liability market has reached an estimated $2.5 billion total written premium. Some industry analysts expect it will reach $20 billion by 2020. Data or privacy breaches have become a “not if, but when” phenomena for organizations of all sizes. Different than the market for traditional (and required) lines of insurance, there are many first-time buyers of cyber cover. The market is accepting of these first-timers and there is ample capacity available; however, underwriters are testing for an organization’s resilience – it’s preparedness, the ability to respond to an incident, recovery efforts, and business continuity planning, as well as IT controls such as encryption and how well employees are trained on data and network security and regulatory compliance, if applicable (e.g., HIPAA). The most competitive premiums will be offered to the most prepared organizations.
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). However, pricing the risk is a challenge for carriers as there is not yet much actuarial data. Nonetheless more insurers continue to enter the market and introduce new products.
“Turn-key” solutions have become popular whereby the cyber insurance policy provides coverage along with value-added services that have been packaged and pre-arranged by the insurer. These services include IT forensics, incident response specialists, and specialized public relations and legal counsel with cyber-event expertise. Experience is illustrating a higher degree of risk with point-of-sale (POS) retailers and large health care institutions. Insurers are closely watching the Payment Card Industry (PCI) as well as other phenomena such as “hacktivism,” cyber extortion, and physical damage triggered by network breaches.
Construction
Although not a line of coverage, but rather an industry sector, construction is increasingly viewed by underwriters as a specialty area. More construction activity was set in motion throughout 2016 particularly in our footprint. There is a broader base of type, size, and scope of projects underway. Shortages of skilled workers plague the industry. Construction defect exposures, difficult legal environments in certain states, and challenging workers’ compensation environments in certain states with a lot of construction (e.g., Florida) have created pockets of disruption for both the general liability and workers’ compensation lines. Overall, there is competition among underwriters for construction programs with relatively stable pricing.
The market remains competitive and there is likely no end to this in 2017 with few exceptions. 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, Florida, California, and New York State. General liability will likely be flat, and automobile will lead with rate increases for the same reasons as discussed earlier. Umbrella/Excess could see moderate upward price pressures, particularly when sitting over large fleets.
Mergers & Acquisitions
Many industry observers see M&A activity as an inevitable solution to P&C insurance companies’ organic growth issues. However, the noteworthy activity seen in 2015/16 with ACE’s acquisition of Chubb (a $28.3 billion deal), the XL/Catlin deal, and acquisitions in the U.S. by Japan’s Tokio Marine and China’s Fosun was not as prevalent in 2016.
Smaller, less noteworthy deals involving specialty carriers were more of the story in 2016. The latest M&A news involves a late December 2016 announcement from Liberty Mutual that it will acquire specialty insurer Ironshore from China’s Fosun for $3 billion in a transaction that’s expected to close in in the first half of 2017.
With low investment returns, continued price competition combined with new and alternative capital entering the industry, and less expensive reinsurance, P&C carriers continue to 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 2017.
Summary
Throughout 2016 and the beginning of 2017, it has been mostly a buyer’s market except for a few lines of coverage (e.g., auto and employment practices liability). There are pockets of turmoil (e.g., cyber for POS retailers, commercial auto with heavy trucking exposures or poor loss experience), but for most lines there is ample capacity, competition for business, and pricing reflecting flat to moderate rate decreases.
*Please note that every commercial insurance program has its own claims experience and other unique circumstances that will influence its rates and premiums; the above overview, therefore, is general commentary on what could transpire across the marketplace and is not specific guidance.
