Global insurance rates lower in Q3, new business pricing suggests competitive market: Marsh

The third quarter of 2014 continued a trend for global insurance rates in some respects – marking the sixth consecutive quarter of decreases – but was different in that the slide in rates has accelerated from the beginning of the year, notes a new report from Marsh.

The Marsh Global Insurance Index shows an overall rate change of -2.8% for Q3 of 2014 compared to the third quarter of 2013, notes figures in the company’s Global Insurance Market Quarterly Briefing, published Monday.

In general, property rate levels saw the largest decreases globally, while casualty and financial products lines were more stable overall.

In the United States, major catastrophes have been limited, continuing a period of stability since Superstorm Sandy in 2012, the briefing notes.

“With conditions remaining favourable to buyers, insureds are researching alternative risk management solutions, including catastrophe bonds and collateralized insurance solutions — and many insureds are also seeking to secure multiyear policies to lock in currently low rates,” Duncan Ellis, Marsh’s U.S. Property Practice leader, states in the report.

With regard to casualty and financial products lines, the briefing points out that the U.S. was essentially flat overall for the quarter, while rate levels in Latin America, Asia-Pacific, the United Kingdom and Continental Europe traded in a range of -4% to -6%.

The briefing details some changes in insurer pricing methodologies and behaviour. Noting that Marsh tracks both new and renewal business price trends, the company reports current rate levels are typically 5% to 10% lower for business that has moved to a new insurer than renewal policies that stay with an incumbent.

While the differential between new and renewal is largest in the U.S. for workers’ compensation, property, and errors and omissions (E&O) lines, it is smaller for directors and officers (D&O) and auto liability.

“Pricing is becoming increasingly sophisticated and analytical insights into new versus renewal pricing trends is just one aspect to gaining the CLTV benefits associated with renewal business by writing new business at a discount,” the briefing states. “Other pricing methods — such as predictive analytics — are making the inexorable march from personal to commercial lines and further accelerating competition risk by risk,” the report continues.

Marsh reports that over time, “this sophistication should shorten the insurance pricing cycle from years to months. Our current 18-month downward trend in rate levels could see a quicker, albeit muted, turnaround in the coming quarters.”

There have also been changes with respect to the influence of capital inflows and outflows on the pricing environment. “Reflective of the US$50 billion in new capital that has been invested in the reinsurance market in the last two years, insurance capacity has been on the rise,” the briefing states.

Noting that some true new capacity has emerged, Marsh reports that the actual deployment of capacity has remained relatively consistent. “What has changed most dramatically with capacity is the ability and willingness of buyers to access it globally. This trend has emphasized the value of multinational platforms, as well as access to capacity now available from insurers in Asia, Europe, and Africa,” the briefing adds.

It further notes that “the competitive market conditions over the last 18 months are also explained, in part, by historically good underwriting results and the lack of large catastrophe losses.”

Looking at a few specific regions, Marsh reports that for U.S. property and casualty, underwriting results were lower than the previous year, but still producing a profit; in the U.K., the Marsh index shows U.K. property insurance with a -5.0% rate change so far in 2014; and in Asia, underwriting results have been favourable.

“Within Asia, insurer results have remained profitable, typically with relatively few natural catastrophes and overall favourable underwriting results,” Martin South, CEO of Marsh Asia-Pacific, says in the briefing.

Low investment yields and favourable pricing for insurers to transfer risk requires “insurers to earn an underwriting profit or chase returns by diversifying their asset mix and potentially exposing themselves to more risk,” notes the briefing, adding that conditions are driving competition among insurers to write more business.

“Primary insurers have been able to become more competitive due to reductions in the cost of treaty reinsurance as a consequence of increased levels of reinsurance capacity and a lack of natural catastrophes,” explains Andrew Chester, CEO of Bowring Marsh, Marsh’s specialist international placement unit.