Why does commercial insurance pricing continue to rise?

Why does commercial insurance pricing continue to rise? | Insurance Business

Why does commercial insurance pricing continue to rise?

Global commercial insurance pricing increased by nearly 6% in the second quarter of 2019, according to Marsh’s Global Insurance Market Index. This marks the seventh consecutive quarter of average pricing increases, and the largest quarterly increase ever recorded since Marsh started conducting the survey in 2012.

The insurance market demonstrated pricing increases in all major geographic regions for the third consecutive quarter. Composite pricing went up in the US (5%), the UK (6%), Continental Europe (2%), Latin America and the Caribbean (1%), Asia (4%) and the Pacific (18%). Furthermore, pricing rose across the three main commercial insurance product lines: property (8%), casualty (1%), and financial and professional liability (nearly 10%).  

“It is definitely an interesting marketplace,” commented Christopher Lang, global placement leader – United States and Canada for Marsh. “To aggregate figures for the second quarter, we brought together a tremendous amount of data, and we believe we’ve come up with a composite figure that’s an accurate description of what’s happening in the marketplace right now. Rates are definitely moving upwards across the board.”

Certain lines of business have seen sharper increases than others, for example, in excess liabilities for large accounts. The global brokerage found that price increases around the world were most pronounced in property (both CAT and non-CAT) and D&O coverages.

“This is a fully-functioning marketplace,” Lang told Insurance Business. “There are dozens, if not hundreds, of market participants on the carrier side, on the intermediary side, and certainly on the client side with all of their diverse risk profiles. It’s hard to single it down to one or two specific catalysts that are all coming together in the first and second quarter to really drive some sharp rate increases.

“One thing we have seen is some significant capacity reduction in the marketplace on certain lines of business and in specific classes of business. In the directors & officers (D&O) space right now, the lead carriers are reducing their lead capacity. Where they used to offer $25 million in limit, they’re now offering $15 million, or even $10 million. The same is true in excess liability and also in large property programs. So, that would be one factor.”

Lang also pointed towards worsening loss trends in both property and D&O insurance. There has been a high frequency and severity of natural catastrophes around the world in the past few years, placing understandable pressure on the property markets. In the D&O space, the sheer increase in securities class action claims, alongside significant settlement cost inflation, are really driving pricing changes in the financial and professional liability sector.

“On a more macro basis, what we observe as we look at the insurance industry overall, is that the market’s liability reserves are deteriorating,” said Lang. “The loss trends are going up, the tail is longer, and the reserves they had in place are deemed to be deficient. And so that becomes another sort of vehicle that insurance carrier leadership looks to improve upon. One of the tools and levers they have to achieve that is rate. It’s not the only tool or lever they can use to deliver better results for their stakeholders, but it’s certainly a significant one.”

With commercial insurance pricing rising for seven consecutive quarters, insurance brokers and agents will find themselves having some tough conversations with clients. “It’s challenging,” Lang admitted.

“Our objective is to secure the best possible deal in terms of pricing, terms and conditions for our clients,” he added. “There’s been a conditioning in the marketplace over the past X number of years in which rates have gone down. So, property started to show a trend upwards over the last seven or so quarters, but the other lines are now coming along fairly aggressively. So yes, it is a challenge, and what we need to do is try and get in front of any rate increases with some clear-cut communication.

“We also believe there’s room for risk differentiation. It’s ever more important in this environment to be clear and concise with respect to the risks that your client presents, to be able to articulate that in a clear and concise fashion to the underwriter, and to try and mitigate whatever concerns they have. That is a strenuous process, it’s a time-consuming process, and it’s something that takes in-depth experience.”