A current view of the insurance market

Transcription

1 Quarterly Market Report for SMEs Quarter two 2012 A current view of the insurance market The first half of 2012 saw: an attitudinal change in the General Insurance market, a continued decline in substantial catastrophe events, premium increases materialising for most policy holders, and a general tightening in overall premium rating. Industry sectors such as those with significant EPS construction, those with physical risks in natural catastrophe zones, those adversely exposed to catastrophe or weather perils (not in normal catastrophe zones), or those with adverse construction or loss experience have experienced the most significant impact. The realities of a commercial market place and tough economic times have to date contained the insurance costs for most other policy holders. General premium increases around the 5-10% mark have become the norm. Clients who had an exceptionally poor claims history continue to be targeted far more aggressively by Insurers for rate increases and many insurers are now 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, but each insurer has an entirely different perspective on what is profitable to them. This is causing substantial switching by insurers. There has been no retreat from risk by the Reinsurance Community and there is still plenty of capital available to support Insurers. This is despite escalating catastrophe loss experience throughout 2011 and some further overseas catastrophe losses during Q1 of However, there is no doubt that, due to the losses incurred by reinsurers, the price for this capital is changing; as yet, not by as much as they would deem appropriate. The current biggest impact on reinsurers seems to be the realisation that they are in a prolonged low interest-rate environment and as such cannot rely on investments to offset poor loss experience. When examining the insurance market it is important to be aware that over two, five, ten year periods and beyond, a myriad of factors can change. This includes (but is not limited to) Insurer profitability and subsequent appetite of insurers available to provide cover. The factors that determine the degree of variation range from the economic environment, climatic conditions, investment market volatility and individual commercial considerations of insurers. Aon provides regular commentary and insights as to how insurance markets move and how that impacts the small to medium business sector. How much reinsurance pricing increase can be transferred to insurers, without losing losing their business, is the bigger question for the remainder of Whether further Reinsurance pricing increases can be achieved, is probably the single biggest market influencing factor for the second half of Whereas the Australian economy is currently described as a two-speed market; the insurance environment is very much operating as a threespeed market and is expected to continue doing so for the foreseeable future. The hard markets of the past are no longer expected:. Individual risk selection by Insurers is now the key to the level of pricing passed to customers. Insurers definitely wish to increase prices further, but these price increases are being contained by commercial pressures. It is becoming a case of price increases being passed to customers on a user pays basis ; those with claims being most affected by price increases. Insurers continue to become more disciplined in how they price risk and are carefully scrutinising risks and policyholders on a case by case basis, with those in high risk areas or with high risk characteristics facing more scrutiny than ever before. Those in sectors with relatively low claims General Advice Warning This information may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product. A copy of the product disclosure statement is available upon request. Page 1 of 5

2 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 and sell their risks effectively to their insurers. Insurers are adjusting their return on capital by better risk selection, rather than attempting broad brush premium increases. Quality risk information and negotiating renewals in a timely fashion, is becoming 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. Early in 2012, the aggregate catastrophe losses continue to grow. Property insurance The property insurance market continues to be dominated by the impact of natural catastrophe events with five of the top 14 most expensive catastrophes in history having occurred over the past two years was noted for the unrelenting frequency and severity of natural catastrophe events: earthquakes in New Zealand; earthquake and tsunami in Japan,;deadly tornadoes and flooding in the United States and, closer to home, flooding and storms in Australia. By year s end, global natural catastrophes in 2011 resulted in record economic losses of $435 billion. Insured losses will exceed $100 billion which is second only to 2005 as the highest loss year on record. Aggregated insurer combined ratios after the third quarter of 2011 were in excess of 110% and even higher for those carriers that underwrite a larger global property book of business. Early in 2011, Risk Management Solutions (RMS) released their version 11 catastrophe modeling software and most major global property carriers are now fully utilising the new update which estimates more severe losses due to tropical windstorms, particularly for locations further inland not previously expected to suffer significant damage has begun with aftershocks affecting Christchurch once more. Further damage was sustained, particularly to newly completed works. Whilst not of the same magnitude as the previous earthquakes, these events have further exacerbated the issue of insurance capacity and coverage for New Zealand, particularly highlighting the difficulty of isolating damage caused by an insured event from that caused by another insured event. There is no doubt that the unprecedented number and magnitude of losses in the region have re-focused insurers and re-insurers attention on underwriting risk in the Asia Pacific region and beyond. Re-insurers have borne a higher than expected portion of the loss due to the number of large events in It is estimated that 73% of the February 2011 earthquake and 44% of the Jan-Feb 2011 Australian flood losses were borne by the reinsurance market after Cat treaty retentions were eroded in the September earthquake in Christchurch. This has driven up the cost of capital for all insurers, whether directly affected by these catastrophic events or not. Local Cat Treaties in Australia and New Zealand have increased in the June and January renewal windows by more than 65% with significant growth in retentions absorbed. Unquestionably we are seeing some profound increases in rates and deductibles together with a diminution in capacity for flood and wind exposed locations in Australia. Conditions in New Zealand are more difficult, with a very significant reduction in available capacity, particularly in Wellington and Christchurch. There is no common pattern to renewal pricing requirements, although underwriters are saying they will achieve 10%+ rate increases across their entire property insurance portfolios in The averaging effect results in better quality clients getting smaller or no increases, particularly with budgetary pressures creating a flight to Non-Cat risks. A combination of the catastrophic losses noted and also the effects of the European debt crisis have seen some European insurers and reinsurers either under credit watch, downgraded varied needs of our clients through our industry knowledge, technical expertise and global resources. For more information on Aon see Page 2 of 5

3 or withdrawing from underwriting business in our region. These issues will have a significant impact on insurers. Specifically within the Australian market there has been emphasis based on underwriting around: North Australian Cyclone No longer considered soft catastrophe region Not in step with rest of market conditions more difficult Capacity significantly reduced few insurers available Catastrophe costs significantly increased Very conservative approach to loss modelling Large event deductibles being requested up to 5% of values exposed. Reduced sub-limits Flood Large event deductibles being requested up to $1,000,000 where significant losses were incurred from Brisbane Floods Reduced sub-limits Coverage was maintained in the majority of circumstances but we are finally seeing some upwards pressure on deductibles/ excesses. That said, we are now aggressively seeing the application of higher deductibles to certain types of risks that are showing repeated exposure to small claims or adverse weather exposures. Insurers are clearly beginning to focus on making small claims become a self-insured risk. Risk selection and pricing is still a major focus for insurers with an increase in micro underwriting leading to three distinct pricing and appetite approaches: profitable business is still subject to competition; normal business is subject to between 5-10% price variance (generally +) on expiring rating; loss-making businesses and those in catastrophe-exposed areas are being declined and avoided at all costs. Subsequent price increases to place loss-making businesses are very significant and are often exceeding 100%. Micro underwriting is the new black. Insurers would prefer to decline unprofitable business rather than try to adjust pricing. It also allows for a greater degree of risk selection to be employed. Much higher pricing regimes are now being applied to unfavourable risks and this will only increase during The supply/demand equation is such, that Insurers can meet their targets with the business they seek. There is no need to write unfavourable risks just to meet revenue targets. Whilst all the pricing focus is on property insurance, many other classes of insurance remain closer to expiring terms. General Liability Rates in primary and excess liability remain competitive. There is pressure on poor performing or high risk accounts but the attempts by carriers to increase rates have failed to carry through to the portfolio as capacity remains to replace if required. It is clear that economic and social inflation is impacting claims and these are manifesting in underwriters books. Reinsurance also is less attractive and so carriers are retaining more to their balance sheets as they compete in soft market conditions. At this stage, risk selection is the key lever underwriters possess to financial profitability but this needs to be balanced against a need for scale and marketshare. Good accounts will be hard fought over and poor performers will be avoided or carry a premium cost. Differention, risk management and claims mitigation pre and post loss will remain the main controls for clients as the market will inevitably seek to correct at some stage in the future. The timing of this will be influenced by a number of factors but it is not anticipated soon and a period of attrition between carriers is expected. varied needs of our clients through our industry knowledge, technical expertise and global resources. For more information on Aon see Page 3 of 5

4 Financial & Professional Risks The first half of 2012 has brought with it mixed challenges depending on the classes of insurance being underwritten. Those risks which are not directly exposed to the ongoing global economic volatility are experiencing relatively stable rates. However, it should be noted that the global instability is starting to generally affect the overall Australian Professional indemnity (PI) market with particular focus on the Financial Institutions (FI) market. Financial planners, valuers, engineers and other professions who have been unlucky enough to have experienced a chequered claims history will continue to be subject to ever increasing pressures on rates. Outside of the FI segment, the number of new entrants into the PI market is keeping a lid on rate increases which would otherwise be inevitable after 8 or so years of continuous rate reductions. The established PI markets are holding out for no further rate decreases as hold the view that that profitability within this sector is now at the point where it is marginal. Whilst there has been great focus/discussion on the Directors and Officers Liability policies with regards to the New Zealand Bridgecorp decision which is still awaiting appeal, it should be noted that appropriate insurance solutions should also be considered within the PI market. There is a general consensus that not much will change within this segment of the market for the remainder of 2012 or at least until investment opportunities outside of the insurance industry provide more attractive investment returns. D&O Liability The first half of 2012 could be best described as soft an abundance of underwriter interest and a finite pool of opportunities. In the SME space underwriters continue to aggressively jostle for position. They are ever hopeful that their initiatives will, not only create brown field, but also green field opportunities. Given the price competitive nature of this segment underwriters are looking to trade through IT based platforms as a means of managing their costs. There is considerable disparity in the policy coverage offered from underwriter to underwriter and clients should be wary. At the larger end of town underwriters continue to trade blows through the offer of broader policy coverage as opposed to further price reductions. With claims frequency and claims quantums rising, underwriters have little margin to offer further discounts. Notably, there has been much discussion with regards to the New Zealand Bridcorp decision, which is on appeal. Appropriate insurance solutions to deal with the issues arising from this decision have been proffered by most underwriters. The key concern for directors and officers in this instance is the courts ability to place a charge over the D&O policy and thereby freezing the directors and officers ability to access policy funds to assist in the defence (costs) of legal proceedings. The introduction of the OH&S Harmonisation Law, which came into effect in most states and territories as at 1 January 2012, has also brought about much discussion and concern for business and their boards. The remainder of 2012 would appear to be on a similar trajectory as the first half of the year. Workers compensation Workers Compensation premiums have been increasing across the underwritten jurisdictions (ie WA, ACT, NT, Tas & Seafarers) during These premium increases are primarily driven by falling investment returns which play an important role in pricing long tail lines of insurance. Premium increases are most notable in Tasmania as this jurisdiction has been consistently under-priced in recent years. Employers with good or improving claims performance have been able to avoid premium increases and, in some cases, achieve premium reductions. Conversely, those with a poor claims history have experienced significant increases. varied needs of our clients through our industry knowledge, technical expertise and global resources. For more information on Aon see Page 4 of 5

5 Personal insurance Over the course of 2011, and continuing during the first half of 2012, we have seen household and motor policies increase in price by 10% and more, as insurers sought to bring these portfolios into a profitable position. Throughout the remainder of 2012 we will continue to experience further rate increases but the range of increases seems to be escalating following the financial impact of significant catastrophe claims being felt. Insurers are signalling significant disbursement of increased reinsurance costs to this and their motor vehicle portfolios. Again competitive pressures are keeping a cap on some premium increases but more and more insurers are passing higher operating costs onto their customers. There is no doubt this remains an area of significant financial losses to insurers. Their focus will be to push pricing until they can recoup these losses. Summary Appetite for movement of risks in the marketplace is reducing. Policyholders will need to pay close attention to their renewal planning and should be preparing detailed risk information for insurers. We are actively working with our clients who have adverse risk profiles to ensure that full and detailed underwriting information is available to ensure the best possible pricing and terms can be achieved from insurers. Insurers are now actively trying to increase market pricing. However, competitive forces are capping their ability to increase. In order to try and return to higher profitability. insurers are therefore focusing on passing premium increases to those who have eroded insurers profitability on a user pays basis. Market conditions in New Zealand are much tougher and there is a decidedly harder market environment with all insurers carefully monitoring their property aggregates. Other classes have also been subject to increased terms. Insurers continue to scrutinise risks closely and are paying much more attention to risk rating criteria. They are no longer prepared to take a broader portfolio approach and are targeting key risk areas with higher prices. A more concerning development is that insurers are reaching equilibrium on the supply/demand equations. Because of this they feel they can tweek pricing on their existing portfolios and they are not as inclined to chase new business. varied needs of our clients through our industry knowledge, technical expertise and global resources. For more information on Aon see CRIS Page 5 of 5