Category Archives: Industry Financials

Eye on commercial insurance prices

Despite ample capital and benign claim cost trends, insurers have held the line on trading profitability for volume, while still responding as needed to emerging trends, according to Willis Towers Watson.

Its most recent Commercial Lines Insurance Pricing Survey (CLIPS) shows that commercial insurance prices in the U.S. were nearly flat in the first quarter of 2017.

Price changes reported by carriers averaged less than 1 percent for the sixth consecutive quarter.

Four lines (workers compensation, commercial property, directors and officers, and surety) showed modest price decreases.

Commercial auto remains the outlier with meaningful price increases reported.

Industry Full Year Results In Context

By now you’ll have read the headlines that the U.S. property/casualty (P/C) insurance industry’s $42.6 billion profit for the full year 2016 was 25 percent lower than its $56.8 billion profit for 2015.

Putting some context around the numbers is important.

I.I.I. commentary: “U.S. economic activity slowed somewhat in 2016 compared to 2015 — real GDP rose by 1.6 percent in 2016 vs. 2.6 percent in 2015—and the P/C insurance industry’s results followed suit.”

And: “this result should be viewed in the context of the last 20 years (adjusted for inflation), in which case the 2016 profit is the median result.”

Two other key takeaways:

—Despite the challenge of ongoing low interest rates, weak domestic and global economic growth and rising claims, the industry nevertheless posted a modest 2.7 percent net written premium growth (compared to 3.5 percent in 2015).

—Overall industry capacity (policyholder surplus) rose to $700.9 billion (up 4.0 percent) as of December 31, 2016. This is a new peak for industry surplus.

As I.I.I. chief economist Dr. Steven Weisbart notes:

“The industry’s performance in 2016 could be characterized as its “new normal,” neither as profitable as in 2013-15 nor as affected by catastrophes as in 2011-12.”

The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).

Guaranty Funds: A Safety Net For Policyholders

News headlines about the failure of long-term care insurer Penn Treaty American Corp. of Allentown, Pennsylvania, underscore that while failures of U.S. insurers are rare, they are possible.

The New York Times reports that the order from state authorities calling for the liquidation of the medium-sized insurer and the closure of its operations leaves tens of thousands of Penn Treaty policyholders in limbo.

The good news is that a safety net exists to protect policyholders.

For decades, life/health (including long-term care) and annuity policyholders, as well as property/casualty insurance customers have been protected against the insolvency of an insurance company through what is known as a guaranty fund system.

So in this case, state life and health insurance guaranty funds will continue to service the policies of Penn Treaty policyholders, ensuring that they continue to receive coverage, despite the insurer’s failure.

To be eligible for guaranty fund coverage protection, it is important that policyholders continue to pay their policy premiums in full and on time.

Maximum levels and types of policies covered by state guaranty funds vary from state to state. Here is a list of the maximum amount each state’s guaranty fund will pay.

More information on the Penn Treaty Network America Insurance Company liquidation via the National Organization of Life & Health Insurance Guaranty Associations.

And here is additional background information on insolvencies and state guaranty funds, via the I.I.I.

How To Keep Commercial Insurance Customers Satisfied

A survey of more than 1,400 risk professionals at large organizations in the U.S. or Canada that have purchased a commercial insurance policy from one of the profiled insurers or brokers throws up some interesting results.

It finds that as rates across the U.S. commercial property/casualty insurance market continue to decline, the key variables in driving overall commercial insurance customer satisfaction are insurer profitability and broker expertise.

The J.D. Power study, conducted in conjunction with RIMS (the risk management society), found a distinct correlation between customer satisfaction and insurer profitability, as measured by total commercial combined financial ratios.

Among large commercial insurers, the highest performing companies in overall satisfaction—XL Catlin (773 on a 1,000-point scale); CNA (767); and Chubb (765)—are also found to have some of the strongest combined ratios in the industry.

This suggests that the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively, according to J.D. Power.

The study found an overall correlation between customer satisfaction and insurer profitability of 0.67, suggesting the more profitable the book of business an insurer has, the greater the likelihood the insurer will also have high levels of satisfaction.

Among commercial insurance brokers, the most significant single attribute driving that performance is quality of advice/guidance provided, with the highest-performing firms, Lockton (863) and Arthur J. Gallagher & Co. (823), outperforming larger rivals by a large margin.

This demonstrates that brokers with in-depth expertise and who have a hands-on, consultative relationship with their clients are consistently driving the highest levels of customer satisfaction, J.D. Power says.

The inverse also appears to be true, as the study shows customer satisfaction declines by an average of 136 points among the 20 percent of customers who indicate their broker does not completely understand their business needs.

Industry-wide, brokers received an average rating of 8.34 on a 10-point scale for the quality of advice/guidance provided metric.

In addition to quality of advice/guidance, satisfaction with brokers was based on the following attributes: reasonableness of fees; ease of the renewal process; effectiveness of risk control services; variety of program offerings; effectiveness of program review; price, given services received; billing and payment process; and claims process.

Satisfaction with commercial insurers is based on five factors: service interaction; program offerings; price; billing process; and claims.

Organizations included in the J.D. Power 2016 Large Commercial Insurance Study have at least $100 million in annual revenue or operating budget.

The Insurance Information Institute provides some useful facts and statistics on the commercial insurance market here.

P/C Industry Resilient Even in Face of Disaster

The property/casualty insurance industry is, and will remain, extremely well capitalized and financially prepared to pay very large scale losses in 2016 and beyond, according to Insurance Information Institute (I.I.I.) president Dr. Robert Hartwig and chief economist Dr. Steven Weisbart.

In their commentary on the industry’s 2015 year end results, Drs. Hartwig and Weisbart note that overall industry capacity remains near an all-time record high.

“Overall industry capacity (policyholder surplus) slipped slightly to $673.7 billion as of December 31, 2015, but was still extraordinarily strong, as measured by a premium-to-surplus ratio of 0.76—virtually the strongest it has ever been.”

They go on:

“Thanks to a surging stock market until 2015, policyholders’ surplus has generally continued to increase with the end of the Great Recession and three consecutive years without large-scale catastrophe losses. But the lack of stock gains in 2015 ended (or at least stalled) this trend.”

At $673.7 billion as of December 31, 2015, policyholders’ surplus was down $1.5 billion or 0.23 percent from year-end 2014.

The bottom line is that the industry is extremely well-capitalized, even in the face of disaster.

As the I.I.I. reports:

“The fact that the P/C industry was able to rapidly and fully recoup its losses to surplus even in the event of disasters like superstorm Sandy (which produced $18.8 billion in insured losses in 2012) is continued evidence of its remarkable resilience in the face of extreme adversity.”

Other takeaways of the industry’s 2015 year end results: moderate profits in 2015, as measured by a return on average surplus of 8.4 percent, virtually the same as in 2014; modest premium growth (net written premiums in 2015 crossed the half-trillion-dollar mark to $514.0 billion, although the rate of increase slipped slightly to 3.4 percent growth from 4.2 percent in 2014); and a below-100 combined ratio for the fourth straight year (97.8 in 2015, compared with 97.0 in 2014).

The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).

Commercial Insurance Rate Declines Continue

The soft market may be limited in length and severity, though that would be surprising, according to the latest analysis of commercial insurance pricing from online insurance exchange MarketScout.

The comments came as MarketScout reported that the composite rate for U.S. commercial property/casualty insurance declined by 2 percent in April, compared to a 3 percent decline in March and minus 4 percent in January and February 2016.

Richard Kerr, CEO of MarketScout observed:

“It seems we may have a reversal of sentiment. Rates are moderating. We are only seven months into a soft market that has so far yielded a maximum composite rate decrease of minus 4 percent.”

Kerr also noted:

“A limited soft market would be a bit surprising noting the current ample market capacity; however, more sophisticated underwriting tools seem to be limiting market swings.”

Rates changed in most coverage classifications with property, business interruption, BOP, inland marine, workers’ compensation, general liability, and fiduciary all moderating by 1 percent as compared to March.

Umbrella, auto, D&O, EPLI, crime, professional and surety were unchanged, according to MarketScout.

By account size, rates for small accounts (under $25,000) were down 1 percent from March to April. All other account sizes were down 2 percent in April 2016, compared to minus 4 percent in March 2016.

By coverage classification, transportation accounts adjusted more than any other industry classification from minus 4 percent in March 2016 to minus 2 percent in April 2016. Manufacturing, habitational, public entity and energy accounts all moderated 1 percent in April, while contracting and service accounts remained unchanged.

Here’s the visual by coverage classification:

Screen Shot 2016-05-11 at 10.43.28 AM

Check out this post over at Artemis blog for more on why the moderation in commercial insurance rates is unlikely to persist.

The Insurance Information Institute has further information with financial results and commentary on the p/c insurance industry here.

Fight for Market Share Continues: MarketScout

Online insurance exchange MarketScout just reported that the composite rate for U.S. commercial property/casualty insurance declined by 4 percent in December 2015.

No line of business tracked by MarketScout saw a rate increase compared to the same month the previous year.

Its analysis was accompanied by some interesting commentary on the market by Richard Kerr, MarketScout CEO.

It may seem like the insurance industry has already been in a prolonged soft market cycle, but we are actually only four months in, Kerr noted.

The market certainly feels like it has been soft for much longer, because rates bumped along at flat or plus 1 to 1.5 percent from July 2014 to September 2015. The technical trigger of a soft market occurs when the composite rate drops below par for three consecutive months.”

AverageP:CRate2001-2015

MarketScout has been tracking the U.S. p/c market since July 2001 and Kerr also made the point that the length and veracity of the market cycles seems to have become less volatile in the last five or six years.

As a result, the impact of hard or soft market in today’s environment may be 5 or 6 percent up or down, he said.

Can you imagine how we would act today in a market such as that of July 2002 when the composite rate was up 32 percent? Or in December 2007 when the composite rate was down 16 percent?”

Kerr observed that underwriters today have better tools to price their products and forecast losses. Further, the chances of a rogue underwriter or company are greatly reduced by the industries’ checks and balances, Kerr said.

In his words:

There may be less excitement but there are probably far fewer CEO heart attacks.”

MarketScout’s historical barometer shows a mean average rate increase of 30 percent in calendar year 2002 and a mean average decrease of 13 percent in calendar year 2007.

The current environment is relatively benign in relation to these volatile years, MarketScout observed.

I.I.I. provides commentary on the p/c insurance industry financial results here.

 

Broker Survey: Insurers Writing More For Less

Business interruption, commercial property, general liability, umbrella, and workers’ compensation were the lines brokers most often noted  had a decline in rates in the third quarter of 2015, according to the latest Commercial P/C Market Index Survey from the Council of Insurance Agents & Brokers.

Broker comments came as The Council survey found rates decreased across all lines by an average of 3.1 percent in the third quarter, compared with a 3.3 percent decline in the second quarter of 2015.

Large accounts saw the largest decreases at 4.1 percent, followed by medium-sized accounts at 3.8 percent, and small accounts at 1.4 percent.

The ongoing buyers’ market was consistent across most lines of business, The Council noted, with a few exceptions, including commercial auto and flood both of which saw a slight uptick in rates. Flood continued to be viewed as a troubled peril, brokers said.

Flood insurance rates increased, especially in the Southeast and Pacific Northwest regions, as rate increases, assessments and surcharges continued to be implemented by the National Flood Insurance Program (NFIP) and Write Your Own Carriers.

Ken Crerar, president and CEO of The Council observed that while rates seemed stable and competition plentiful, the brokerage industry is keeping an eye on many factors that may have an impact on insurance placements going forward.

We heard from our brokers about the growing cyber insurance market, consolidation in the industry, and attracting and retaining talent.

These are long-term, macro-level issues that have been percolating for years.”

Check out latest I.I.I. information on  industry financial results  here.

Where is the Insurance Float?

Insurance Information Institute (I.I.I.) chief actuary James Lynch explains  how insurance float works and the impact it has on insurance rates.  

Asked for the secret to his success, famed Berkshire Hathaway CEO Warren Buffett often points to insurance float, “money that doesn’t belong to us but that we can invest for Berkshire’s benefit.”

He is talking about premium and loss reserves, the funds that any insurer holds while waiting for claims to settle. That money gets invested, and the investment income is an important revenue source for insurers. It also lowers insurance premiums, since actuaries take investment income into account when setting prices.

But these days float isn’t so buoyant, as you can see from the accompanying chart, which shows the net new money yield — what insurers typically obtain when they invest the float, adjusted for inflation. The National Council on Compensation Insurance (NCCI) estimates the yield, and we at  I.I.I. made the inflation adjustment.

USPCNewMoneyVsCPI

The chart goes back decades, and it is easy to see the steady decline in yields. Thirty years ago the float yielded 5 percentage points above the inflation rate.

Yields have fallen inexorably. In recent years, the float has struggled to beat inflation. The post-recession peak has been 2009, when new money yields beat inflation by 2.6 percentage points, but in four of the past six years the net new money yield was negative.

Insurers differ in their investment strategy, but taken as a whole, the industry has suffered from the loss in yield. As a result, insurers have had to deliver better underwriting results in order to be as profitable as they were 10, 20 or 30 years ago.

Last year the property/casualty industry wrote a combined ratio of 97, and delivered an 8.2 percent return on equity.   The industry had a similar ROE in 1983 — 8.3 percent – but ran a combined ratio of 112, thanks in no small part to the tailwind provided by investment yields nearly 8 percentage points above inflation.

Put another way, rates have to be about 15 percent higher today to achieve the same return as a generation ago, and that’s before considering inflation or any other changes in the marketplace.

P/C Insurance Pricing Still Competitive, Says MarketScout

The average price of insurance for all U.S. businesses remained the same in April 2015 as it was in April 2014, according to the latest analysis from online insurance exchange MarketScout.

MarketScout CEO Richard Kerr noted that the market remained flat with a zero percent increase in April 2015, down from a 1.5 percent increase in October 2014, continuing the downward trend of the last eight months.

Kerr said:

It’s not dramatic but it is a trend. Coastal property may experience some slight rate increases since we are on the cusp of the wind season. Rates on all other exposures should continue to be quite competitive.”

By coverage classification, rates for business owners policies (BOP), professional liability and D&O coverages decreased in April 2015 by one percent as compared to March 2015, MarketScout reported.

However, commercial auto coverage actually saw a 2 percent increase, while rates for all other coverages remained the same.

By account size, rates remained the same for all except jumbo accounts (over $1 million in premium) which adjusted to a rate reduction of minus 2 percent in April 2015, compared with rates the previous month, MarketScout said.

I.I.I. provides commentary on the P/C insurance industry financial results here.