All things considered, for a hard market, today’s property/casualty insurance market has actually seemed pretty soft. Following a trend that began in 2011, insurance buyers once again saw rates climb in 2013. But unlike hard markets of the past, these increases have been modest. Throughout the year, MarketScout reported 4% to 5% price increases over the year before, but even this level has been hard to sustain. In December, the industry analyst reported that the pace of price increases had dropped to plus 3%—a trend that many expect to continue.
“If you are in favor of significant rate increases in 2014, you may be disappointed sans a catastrophic event or some sort of new tort liability issue,” said MarketScout CEO Richard Kerr. This sentiment was echoed in rating agency Fitch’s “U.S. Property/Casualty Insurance Outlook Report,” which simply stated, “Pricing is likely to improve further through the first half of 2014, but at a diminishing rate.” Fitch projects that net written premiums will show a 4.3% increase in 2013 that will dip to 3.6% in 2014.
To an extent, these tentative pricing increases are a product of the overall success of the property/casualty market. Financially, 2013 proved to be a healthy year for property/casualty insurers. The industry saw an overall underwriting gain in 2013 of about $16.5 billion, a $30 billion improvement over the $14 billion underwriting loss posted in 2012, according to Fitch. The industry’s net income in 2013 also increased to $51 billion, a 40% jump over the previous year. Insurers saw their combined ratio of losses and expenses to premium dollars collected improve from 103.2% in 2013 to 96.4%, its most favorable level since 2007. Additionally, policyholder surplus levels increased by about $43 billion over 2012, reaching a record $624 billion by the end of the third quarter.
“The current supply of capital dedicated to the global property insurance market continues to temper rate increases, even on those accounts with losses,” said Duncan Ellis, U.S. property practice leader for Marsh. “It’s a different property market than it was a year ago when Superstorm Sandy made landfall in the Northeast causing underwriters to tighten terms and conditions, restrict capacity, and raise prices.”
Pressure from Interest Rates
One of the few areas of potential concern for property/casualty insurers is low interest rates that have kept investment earnings down. Before the financial crisis, insurers’ annual investment earnings exceeded $54 billion. But today, earnings have slipped to around $48 billion, not only creating more pressure to raise premium rates and improve underwriting performance to compensate, but encouraging insurers and investors to seek out new opportunities for revenue.
“Investors are clamoring for decent returns in instruments not directly connected to the stock market,” Kerr said. “When this occurs, smart people come up with creative solutions to put these investor funds to work. Insurance-linked securities and new age reinsurance structures have opened the insurance market to many new investors and, as a result, additional capacity. This added capacity may well put additional pressure on rates in 2014.”
Ironically, however, the sluggish economy that has forced the Fed to keep interest rates low also prevents insurers from raising rates dramatically, as it reflects a sluggish consumer demand for all goods, including insurance products. Of course, the reverse is also true and, as the economy continues to improve as expected, so will the fortunes of both insurers and insurance buyers. This could make the need for rate increases somewhat moot.
The Catastrophe X-Factor
The great unknown for the property/casualty industry has always been catastrophe losses. The industry benefitted from a relatively calm year for natural catastrophes in 2013. According to Munich Re, insured losses totaled about $31 billion worldwide, down from a 10-year average of $56 billion.
Despite most pre-season predictions that suggested above-average activity, the 2013 Atlantic hurricane season was one of the quietest in decades. Only two storms reached hurricane intensity—the lowest total since 1982. In the Pacific, however, Typhoon Haiyan became one of the strongest storms to ever make landfall, devastating the Philippines and killing more 6,000. While overall losses were estimated at $10 billion, insured losses were only in the millions due to low insurance penetration in the area.
The costliest disasters in terms of insured losses were from hailstorms in Germany and floods throughout central Europe that each cost insurers more than $3 billion. Severe flooding in Canada caused almost $2 billion in insured losses, making it the most costly natural catastrophe in the country’s history. In the United States, tornadoes caused the most insured damage, including a EF5 twister that destroyed Moore, Okla., causing $1.8 billion in insured losses.
Overall, it’s almost certain that 2013 will prove to be an anomaly in terms of catastrophe losses. At the very least, the United States is statistically overdue for a major hurricane to make landfall (while Hurricane Sandy was a Category 3 storm at its peak, it was only a Category 1 storm when it made U.S. landfall). Nevertheless, the industry has enough of a surplus to absorb a large loss, and 2013’s low catastrophe losses have helped improve insurers’ bottom lines in the short term.
According to Jonathan Hall, executive vice president at FM Global, “2013 was a very good year for the industry with generally fewer and less severe natural catastrophes than 2012. Because the industry is awash in capital due to fewer losses and alternative capital sources, I believe 2014 will be another competitive year. With industry loss experience being so good, there is no shortage of capacity looking to find a home.”
After all is said and done, 2014 seems poised to follow a similar path to 2013 in terms of market conditions. Prices should continue to increase, but with such a large amount of capacity available and an unpredictable demand, intense competition for business will keep any increases from getting out of control. As a result, insurers may have to focus on other ways to differentiate themselves in the marketplace, which could mean new innovations and improved service, especially when it comes to integrating technology and developing better data analytics and risk modeling, which will certainly benefit the insurance buyer in the end.