Searching for stability
Watching developments in the property and casualty (P&C) insurance lines over the last couple of years has been like watching a landslide, where a slight change in an unstable environment can cause the higher ground to shift, starting a chain reaction of compounding issues that destabilize the ground below.
In 2022, inflation was the catalyst. For first-party risks, increasing prices on materials and supply chain disruptions had a compounding effect on insurance claims costs. On the casualty side, social inflation continued to lead to disproportionately high claims.
As reinsurers lost their footing, particularly after Hurricane Ian, they made wholesale cuts in property reinsurance capacity, resulting in both substantial price increases and larger retentions for many retail insurers. Retail insurers began overhauling their property insurance portfolios, reducing capacity and driving a hard property market for consumers that, in many ways, surpassed hard conditions experienced in 2020.
For property insurance, these hard conditions have prevailed throughout 2023. With the combination of inflation, Maui wildfires and convective storms, the industry will close 2023 with more than $100 billion of insured property losses, despite what may end up being a mercifully calm Atlantic hurricane season. A possible silver lining could be that the restructuring of reinsurance treaty retentions throughout the year will leave the capital base poised to generate meaningful returns. If that occurs, additional capital could come into the property insurance marketplace and help mitigate the hard property market in 2024.
This is not, however, to suggest the return of solid footing.
Heading into 2024, casualty treaty reinsurers are telegraphing concerns around social inflation and rate adequacy in the liability lines. If investment and reinsurance capacity falls out of the liability lines, the current “moderate” rate environment could be pushed into harder conditions.
From an economic standpoint, news headlines drive a sense of uncertainty amid war in Ukraine, conflict in the Middle East and a slowing Chinese economy. Yet the P&C industry remain well capitalized with $1,018.6 billion in policyholder surplus and increasing yields as of June 14, 2023 according to AM Best. While the markets aren’t yet willing to adopt the cash flow underwriting concepts of the early 1990s, the improved investment yield undoubtedly will continue to help carriers’ bottom lines.
Despite the shifting terrain, in the near term, we don’t expect material or sudden changes in the market – for better or worse. The property market will try to lean into the hard market for as long as possible (which could be increasingly difficult if new money comes into the market on January 1). With a constricting capital base and current insurers remediating their liability portfolios, the casualty market might attempt to drive rate increases.
On a brighter note, the financial lines, including cyber, appear to be on steady ground in a soft market. It would likely take a couple of considerable claims or a troubled financial market for the financial lines to begin to slip significantly toward a hard market.
Thank you for your interest in this edition of Insurance Marketplace Realities and we look forward to working with you in navigating a dynamic market.
Here are some highlights from our 2024 predictions:
Insurers are pressured to obtain higher returns for deployment of catastrophe capacity/aggregate driving premium increases for insureds while inflationary pressure, reinsurance optimization and persistent scrutiny on valuation of assets remain.
As insurer balance sheets were impacted by severity in losses and subsequent premium needs, both clients and insurers needed to change limits and structures to absorb the impact.
The market remains stable within a complex landscape. Capable markets are offering competitive terms and pricing while also investing in strategies to set themselves apart.
While the casualty landscape has continued to trend favorably, the year began with significant headwinds in the property market, and these challenges have persisted and accelerated through 2023.
The Canadian casualty marketplace continues with positive but cautious momentum toward a more buyer-friendly marketplace. For property, capacity for Canadian commercial risks remains stable.
While market stabilization has continued in 2023, organizations should continue to focus on improved cyber security hygiene to offset a potential market shift due to ever-expanding cyber threats.
Where insureds had experienced material premium relief in previous renewal cycles, the extent of decreases may begin to taper off.
The EPL market continues to stabilize largely due to competition with markets eager to write new business and maintain their renewals.
As insurers continue to correct rates to better align with long-term loss trends, legacy markets’ pricing at the primary layer level have been positively impacted.
Despite competitive premiums and steady loss activity, insurers continue to look for opportunities to grow their fidelity and crime books of business.
Despite conflicting positive and negative risk developments and some carriers remaining wary, a few carriers with increased appetites are leading to improved market conditions.
The availability of capacity in the marketplace continues to drive competition across all lines of business for financial institutions.
The market remains consistent in its ongoing concerns such as inflation and increasing exposures, but capacity is still plentiful and such concerns are not having a material impact on overall pricing.
Structured and parametric solutions were the most traded alternative risk products in 2023, and we expect this to continue in 2024 due to continuing pressure on lines such as property and for clients who have had significant losses.
Adverse severity claim trends reported by most professional liability (PL) carriers continue without any signs of improvement. Social inflation is being cited as the primary driver.
While there is now less consistency in insurance rate movements than in the previous period, some difficult areas remain.
Although rate decreases on renewals are still rare, we are experiencing positive trends in renewal pricing for contractors that we expect to persist throughout 2023.
New capacity and sustainable sector claim performance year-to-date is yielding improved results for buyers, but risk differentiation remains key to success.
The ability of companies to understand and differentiate their environmental exposures in the current marketplace will be their key to success.
Markets are careful in deploying capacity.
The special risks insurance markets have almost uniformly removed all cyber extortion coverage from their policy forms.
Product and professional liability rate predictions remain in the mid-single digits.
Conditions continue to stabilize, but systemic risks and concern over regulatory investigations and claims, mass tort, antitrust and class action claims are still driving coverage restrictions.
Due to the current state of the property market, marine insurers are being asked to provide an alternative stock throughput program structure option.
The marine market remains firm with demand for price adjustments across the board and higher end of range for challenging risk exposures.
Market conditions continue to deteriorate for personal lines clients. Recent storms have exasperated an already stressed market fleeing from years of persistent high loss ratios.
Instability and unpredictability are in a heightened state. We recommend seeking longer policy periods to guarantee capacity and flat pricing and taking cover.
Recalls continue to increase across most industries as FDA and NHTSA recalls continue to be the driving force as recalled units have increased 13.7%.
Property renewals are of most concern to owners and operators, especially those in CAT-prone and challenged occupancies.
The global construction industry continues to face downward pressure as high inflation and tightening monetary policies limit investment growth.
Rates continue to be impacted by major events in Chile, Hong Kong, South Africa and Ukraine. However, Q1 to Q3 2023 loss ratios have been much lower compared with more recent years.
The North American trade credit market remains robust and highly competitive. Insurers continue to be pressured on their rates and overall capacity as new entrants push for market share.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for losses relating to the Ukraine crisis. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include coverage relating to the Ukraine crisis. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third-party sources we consider reliable; however, we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. The Ukraine crisis is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.
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