2018 Commercial Insurance Update and Outlook
Hello Tague Members,
Willis Towers Watson recently put out their update and forecasts for the Commercial Insurance market. The article below is detailed and provides some insight on the trends by the line of business within the Commercial Insurance segment. If you write a commercial, take a few minutes to update yourself on where things stand and where they may be going. One of the big takeaways is that in the face of massive catastrophic losses from the hurricanes and wildfires, the industry has been very resilient. The exception is Commercial Auto. This is a segment that rate increases have moderately improved the loss ratio results over the past two years, but the loss trends are still very negative. We will probably continue to see rate increases being put into the system by carriers, so do not be surprised by more renewal disruption in the Auto space in 2018 and probably 2019. Overall Commercial Lines is still in a very competitive and growing position which is what all of us are experiencing in our marketplace. This brings challenges and opportunities and we must make sure that we are providing phenomenal client experiences with new and existing clients which increases our retention and drives referrals.
Cheers and happy selling! Tony V
Insurance Marketplace Realities: Overview
2018 Spring Update on Commercial Insurance in North America
April 12, 2018
Toward a smarter marketplace
It appears we in the insurance industry have an answer to a fundamental question we’ve been asking ourselves for several years now: Is the hard/soft cycle — catastrophic losses creating rate spikes followed by gradual retrenchment and price easing — no longer the main economic force driving our industry? The answer is yes.
Between HIM, the acronym given to the one-two-three hurricane punch of Harvey, Irma and Maria, and the California wildfires that followed, the latter half of 2017 brought record-breaking losses. In the marketplace response, property rates rose, steeply for buyers with catastrophe exposures and losses, but no insurer insolvencies resulted. The rate increases are already beginning to moderate, with some decreases again becoming possible for better risks. The swiftness with which the industry recapitalized was something of a marvel, especially to those of us who have lived through past insurance cycles and seen plenty of chaos, carrier failures, pricing upheavals and the creation of new insurance start-ups.
Commercial rate prediction charts
For 2018, ten lines are expecting increases
|Auto||+5% to +9%|
|Casualty||Flat to +4%|
|Employment practices liability||Flat to +5% (–5% to flat on excess
for mid to large companies)
|Energy||+5% to +10%|
|Environmental||+10% to +20%|
|Errors and omissions||Flat to +5%|
|Health care professional liability, senior living and long-term care||+5% to +20%|
|Product recall||Flat to +5%|
|Property||+5% to +20%|
|Trade credit||Flat to +5%|
Two lines are expecting decreases
|International casualty||–5% to –10%|
|Political risk||–2% to flat|
Ten lines are predicted to deliver a mix of small increases and decreases or flat rates
|Aviation||Flat to +5%|
|Cyber risk||–3% to +5%|
|Construction||–5% to +15%|
|Directors and officers||–5% to +5%|
|Fidelity and crime||Flat|
|Fiduciary||–7.5% to +5%|
|Kidnap and ransom||–5% to +5%|
|Terrorism and political violence||Flat|
|Workers compensation||–2% to +2%|
So, what does this mean?
For insurers, it means they (and their investors) can’t rely on the old market cycle to produce long-term gains. They will have to increase their income by providing better, more valuable products and doing so more efficiently. We see four transformative steps insurers are already taking to make this happen:
- Growing larger and more strategically diverse through mergers and acquisitions
- Cutting expenses through technology and automation
- Underwriting more selectively and individually in a more disciplined approach
- Creating innovative solutions for emerging risks along the lines of cyber solutions that combine insurance, preparedness and incident response support
Examples of the M&A activity include the AIG-Validus deal and the proposed AXA-XL combination, offering the acquirers broader, multiple platforms and a return into business lines they had previously exited. The Ace-Chubb merger is now old news but remains another resonant example. The breadth of these global companies offers new opportunities for growth and a greater resilience against regional activity, including the regulatory and tax changes that affect the movement of capital.
In cutting expenses, insurtech has put us on the cusp of what could and should be dramatic reductions in the human and financial resources spent on the administrative side of the business: the billing, the policy and certificate issuance, and the claims adjusting and paying mechanics. Increasing investments in artificial intelligence and secure transactional technologies, such as blockchain, hold out a promise to squeeze costs while improving product quality, service times and responsiveness.
In underwriting, we have heard for a long time about the need for more discipline. Yet, this discipline has mostly referred to the desire of insurers to hold the line on rates during long soft markets — which the laws of supply and demand usually would not allow, given the influx of new and traditional capital lifting supply while creating downward pressure on prices. Now, we are hearing more about being selective and treating risks individually. We are being encouraged to walk away from risks if the numbers don’t look right and pushing only modest rate increases that the marketplace will bear. True, this approach could prove to ring hollow, but in the immediate aftermath of 2017’s losses, insurers that took a broad-brush approach did not succeed. Selective, careful underwriting appears to be succeeding.
In regards to innovation, the cyber example is the clearest demonstration of how new risks need new responses. For other perils, such as climate change and the reputational risks that keep business leaders up at night, creating typical risk transfer solutions has not been easy. We would suggest that the big data revolution could offer avenues for quantifying risks that have been difficult to quantify before, and creative thinking will offer ways to create products that will find an eager audience.
For buyers, all of this is good news. In the short run, buyers may see prices rise in response to undeniable loss trends. We are seeing a continued uptick in auto rates as losses keep growing. In general liability, loss trends may be creating similar upward pressure on pricing. For property, the increases we saw in Q4 — not the skyrocketing drama many predicted, but still notable — are already lessening.
We are optimistic because we see a marketplace that will continue to enjoy an influx of capital, which, in the absence of record-setting catastrophic losses, will depress prices. Moreover, we see a marketplace that will provide more value for the risk mitigation dollar as analytics, new products and data-driven, case-by-case underwriting hone in on the needs and objectives of individual buyers.
For brokers, these trends are also good news. As always, our role is to bring insurers and buyers together in the way most useful to buyers. As new products develop and underwriting becomes more sophisticated, the advice we offer will be more essential. But make no mistake, the need for efficiency in the administrative aspects of our business is an imperative for brokers as well as underwriters.
Technology will underpin much of this progress, freeing up underwriters to innovate, customize products and exercise judgement in assessing risks. It will also free up brokers to offer the analysis and perspective that will ensure buyers achieve the greatest value.
Artificial intelligence and the data it is built on will play a growing role in our industry, as will human intelligence. The old cycle may be a thing of the past, but the new paradigm will create a more efficient and smarter marketplace.
Joseph C. Peiser
Head of Broking
Willis Towers Watson North America
Insurance Marketplace Realities
Looking forward, looking back
Comparing our rate predictions from Fall 2017 to those we are presenting in these pages, we see more lines expecting increases. However, the predicted rate increases on property are lower now, thanks to the resilience of the marketplace and the swift influx of capital. For general liability, umbrella and excess casualty lines, we forecast rates to rise by small amounts but incrementally higher than the price rises we predicted last fall. Workers’ compensation rate predictions are mostly flat, while auto rates, reflecting loss trends, are expected to rise more steeply — in some cases nearly into double digits.
For more on the recent movement in commercial insurance rates, see our Commercial Lines Insurance Pricing Survey 2017 Q4 data.
Most buyers can expect their insurance spending to rise in 2018, though the dramatic predictions of eye-popping increases that came in the wake of the record-setting 2017 catastrophes are now behind us.
Overall, ten lines are expected to see price increases, two will see decreases and ten will see a mix of both (or flat renewals).
Market trends: lines facing increases, decreases or a mix
|2018 spring update||2||10||10|
|2017 spring update||10||6||7|
|2016 spring update||9||8||5|
The 2018 spring update figures reflect the absence of marine in this issue; the 2017 figures reflect the addition of international coverage as a separate line; and the 2018 figures reflect the addition of product recall and the subtraction of employee benefits, which are no longer covered in this report. In this issue, casualty lines are discussed in one combined report but are included in this table as separate items.
Two lines that were seeing reductions last fall have changed direction. For directors and officers insurance, small decreases have shifted toward a range of single-digit increases to small decreases depending on risk profile. For environmental coverages, predicted decreases have flipped, and most buyers can expect these rates to rise.
For more insight on how you can prepare for a marketplace in flux, contact your local Willis Towers Watson representative.