Willis points to mounting US property insurance pricing pressure
Pricing commentary from US P&C carriers in Q2 earnings calls will be scrutinised for signs that momentum on rates in some classes of business is coming under pressure after Willis said it expected softening in property through the second half of the year.
The sector is due to begin reporting later this week and all eyes will be on whether the bullish pricing outlook reported by many carriers in recent quarters will be sustained.
In a report published last week, Willis said downward pressure on both cat and non-cat US property insurance rates is expected.
The suggestion of a negative outlook for underwriters conflicts with recent pricing surveys from the likes of MarketScout, as highlighted by Westhouse analyst Joanna Parsons in a note today (15 July).
Willis said it is revising its property insurance forecast for the second half of 2013, with rates expected to fall on cat-exposed risks with steeper reductions still on non-cat risks.
In the first half of the year non-cat property that hadn't been affected by Sandy losses was experiencing rates at renewal that were flat to down 5 percent, according to Willis.
Brokers of cat business unaffected by Sandy, meanwhile, were only able to achieve rates at flat to up 5 percent for their clients at renewal in the first and second quarter.
But Willis said that in the last two quarters of the year it expects non-cat accounts free of Sandy losses to renew down 5-10 percent, while rates on similarly unencumbered cat business would improve for buyers to flat to down 5 percent.
"The additional movement in the property market is being driven largely by new capacity entering the marketplace, and represents a significant shift from Willis's forecast just a few months ago, particularly on catastrophe-exposed programs," said Dave Finnis, who heads Willis North America's national property practice.
"Recent renewals were oversubscribed," he added.
Some of the new capacity comes from Berkshire Hathaway Specialty Insurance, which has already been active in the marketplace since news of its launch was broken by The Insurance Insider in April.
New capacity also includes lines available from Chinese insurers including People's Insurance Company of China and China Pacific Insurance Company, as also previously reported by this publication.
Meanwhile, Willis cited the impact of broker facilities such as Aon's "Sidecar" arrangement with Berkshire Hathaway, and its own Willis Global 360 initiative.
In addition, the broker highlighted the falling cost of reinsurance at mid-year renewals, with rates down 10-15 percent at 1 July, and Florida pricing off 15-20 percent.
Insurers have benefited from relatively benign losses in the first half of the year, despite the tornado activity, which has helped many deliver combined ratios between 75 and 85 percent for the period, said Willis.
In the absence of a large loss event, the downward pressure is set to remain through the year.
However, Finnis pointed to conditions that differ for accounts directly impacted by Sandy, where pricing "varies widely depending on loss history and severity".
The Insurance Insider reported in its June issue that US property cat insurance rates are now coming under increased pressure.
At 1 June - the second busiest renewal date for cat-exposed property in the world's biggest insurance market - loss-free commercial cat risks outside the Northeast were seeing price falls.
The impact was greater on excess rather than primary layers, as in some cases underwriters showed a willingness to put out more capacity, aided by cheaper reinsurance.
In her note in response to the Willis release, Parsons observed that the firm's findings do not appear to tie in with MarketScout data, where commercial property rates have risen 5-6 percent measured month-by-month compared to the prior-year period in the first half of the year.
"The shift in rate expectations by Willis is clearly a bit more negative, but does not exactly tie in with what we are seeing from MarketScout. However, what is evident is that we are not seeing any reduction in capital in the market but instead the converse," she said.
Parsons suggested that, while some of the new capacity may only be playing in certain areas, such as the larger risks that Chinese entrants are targeting, it is "still adding supply and that can only be detrimental".
She added that Berkshire's entry into the excess and surplus lines space would be a threat to Lloyd's as a lead player in the sector.
"The two steps forward, one step back market continues to be the theme for the (re)insurance industry. This is not an easy market where everything is rising and the rating outlook is rosy - this remains a challenging market but one where pockets of opportunity remain - that is the key to the investment story," Parsons explained.
Her own preference remains for stocks where return on equity is good but not reflected in the price to book multiple, and where investors are being paid to hold the shares, she revealed.