Industry Insights

The insurance market continues to be unpredictable with market movements varying almost quarter to quarter.

The influencing factors of market profitability, the economic environment, climatic conditions (natural events), investment market volatility and individual market strategies remain the same. What does differ, are the individual fluctuations and impacts of these factors.

2012 has seen:

  • a reduction in catastrophe events
  • premium increases materialising for most policy holders
  • a general tightening in overall premium rating
  • Insurers looking to increase capacity offering for low hazard clients
  • the first six months have seen most insurers report a return to profitability.

Insurers are more disciplined in how they price risk and are carefully scrutinising risks and policyholders on a case by case basis. Those in high risk areas or with high risk characteristics are facing more scrutiny than ever before.

Areas of concern continue to be:

  • in high natural catastrophe zones
  • clients who have suffered large attritional losses
  • clients with operations consisting of inferior construction, e.g. EPS.

Those in sectors with relatively low claims activity are likely to be treated more favourably, especially if they demonstrate a commitment to risk management, prepare well ahead for renewal negotiations, and explain their risks effectively to their Insurers. Insurers are adjusting their return on capital by better risk selection, rather than attempting broad brush premium increases.

That said, with the first half of 2012 being in stark contrast to 2011, Insurers are showing signs again of moving into growth mode. General premium increases of around the 5 to 10 per cent mark had become the norm in the first half of 2012 with clients who had an exceptionally poor claims history targeted far more aggressively by Insurers for rate increases and many Insurers declining to quote unsuitable risks. As Insurers seek to move away from unprofitable risks, they naturally seek to replace these with profitable business and this creates competition for the most profitable risks.

There is growing evidence that as we move into the last quarter of the year this behaviour will result in a flattening of pricing outcomes. Reductions may be possible for those industries where all positive influencing factors of increased capacity and competition can be utilised.

There has been no retreat from risk by the Reinsurance community and there is still excess capital available to support Insurers. However, there is no doubt that due to the losses incurred by reinsurers, the price for this capital is changing - though not as yet by as much as they would deem appropriate. With direct markets moving back into growth and pressure back on pricing, the direct market will look to retain risk that they may traditionally have transferred back into the reinsurance market.

How much reinsurance pricing increase can be transferred to insurers, without losing their business, is the bigger question for the remainder of 2012. Whether further Reinsurance pricing increases can be achieved, is probably the single biggest "market influencing factor" for the second half of 2012.

Whilst this wont immediatley influence direct pricing it will be interesting to see how long the reinsurance market will maintain their position before looking to return to the market to regain market share. When this happens, market competition will grow with further pricing reductions to be expected.

For clients, quality risk information and negotiating renewals in a timely fashion, is the key to ensuring insurers respond favourably to the terms applied to high calibre risks. Looking forward, the insurance industry is in good shape, with ample capacity available. We believe that this capacity will result in a cap being maintained on premium rises during the remainder of 2012 unless further substantial catastrophe losses occur.

 

 

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