OK, time to fess up. In a blog in February 2018, I dismissed the rumor that a hardening insurance market was on its way. As a matter of fact, I stated “Next time I get asked by a reporter whether I think a hard market is coming our way, I will give them the same answer I gave at the end of last year: hard market, schmard market” – ouch!
Well, as we are all aware, the insurance market has certainly been hardening over the last year. Even though I still believe that the broader insurance market is more stable now, with better loss control, better data, more capital, and the maturation of the captive insurance industry, it is tightening. According to the second quarter 2019 Marsh Global Insurance Market Index, commercial property rates in the U.S. increased nearly 10% in the second quarter, which is twice the level of recent quarters.
And though the hardening market is impacting several different lines, I thought the explanation as reported in Business Insurance by Bret Ahnell, Executive Vice President of Staff Operations at FM Global, on property insurance (a large area in the captive marketplace) was instructive:
1.) The commercial property insurance industry has been losing money. There have been declining rates industry-wide for more than a decade while carriers have offered broader coverages. At the same time the industry has been contending with increased risk as a result of global economic expansion. In fact, the property and casualty industry has been above a 100 combined ratio in 6 of the last 9 years. Only 2013-2015 were profitable, explained by extremely low losses from natural disasters. Yet, when big natural catastrophe losses resulted from events, including hail, hurricanes, flooding, wildfires, and monsoons, the industry again posted losses in 2017 and 2018.
2.) Bonds markets have remained lackluster. While investment yields in the stock market have been favorable during this time, the returns in the bond markets — which most insurers primarily rely upon for investment income — have remained lackluster. The result is the industry hasn’t been able to use their investments to offset bad underwriting results. Carriers have had to adjust rates and coverages as needed to better ensure an underwriting profit.
3.) Regulators are gaining more sway in underwriting behavior. The role of regulators is having an impact on underwriting behavior and discipline. More than ever the insurance industry needs to be able to demonstrate sustainable business models and profitability across each line of business.
4.) New U.S. tax laws have increased tax liability while driving down profitability. Where previously carriers could write off 35% of a loss, today, it is only 21%, which ultimately means more selectivity when placing capacity.
It all adds up to a commercial property market that requires underwriting discipline and a continued correction over time. And, in this market, those clients who understand and commit to property loss prevention and risk engineering will do better than those who don’t. That means captive owners will most likely be adding more to their risk portfolios.
On that cheery note, I hope you all have a wonderful and safe Thanksgiving!