Reporting an aggregate first-quarter 2013 jump in commercial insurance prices of almost 7 percent, Towers Watson said the result marks over two consecutive years—nine straight quarters—of price hikes.
The results of the current edition of Towers Watson’s Commercial Lines Insurance Pricing Survey (CLIPS) also mark the fifth quarter of increases across every one of the lines surveyed by the global professional services company.
CLIPS data are based on both new and renewal business figures obtained directly from carriers underwriting the business. The survey compared pricing for coverage purchased during the first quarter of 2013 to that of the same quarter in 2012 as reported by participating carriers. For the most recent survey, data were contributed by 40 participating insurers representing approximately 20 percent of the U.S. commercial insurance market (excluding state workers compensation funds).
To put the results in perspective, Robert Hartwig, president of the Insurance Information Institute, noted last week that the overall aggregate increases that started in the middle of 2011 came after 30 consecutive quarters for price declines. “For the industry to achieve its cost of capital on an industrywide basis, we need a couple of more years” of rate increases, Hartwig said, speaking before today’s CLIPS report was released during a presentation at the Standard & Poor’s Annual Insurance conference.
Towers Watson said that overall price changes indicated by the first-quarter survey of carriers are consistent with the results of the two prior surveys, with pricing for each line of business increasing by at least 4 percent.
Among the survey’s key takeaways:
In a statement, Tom Hettinger, Towers Watson’s Property & Casualty sales and practice leader for the Americas, noted that first-quarter price increases for property—in the mid-single digits—were more modest than might have been expected considering losses related to Hurricane Sandy, adding, however, reinsurance capacity impacted pricing.
“Capacity has definitely increased for property reinsurance, as mainstream investors are joining specialists in the search for yields, specifically through alternative investments such as catastrophe bonds and collateralized reinsurance,” said Bob Betz, Florida practice leader of Towers Watson’s Brokerage business. “June renewals of Florida personal lines business are an example of additional capacity significantly lowering prices on a risk-adjusted basis.”
“We see reductions of 15 percent to 20 percent, and even more in isolated cases,” Betz said.
Towers Watson noted that historical loss cost information reported by participating carriers indicates a very preliminary improvement in loss ratios in the first quarter relative to the same period in 2012 (excluding any identified catastrophes), with earned price increases more than offsetting reported claim cost inflation.”
“This builds on the estimated improvement of more than 2 percent between 2011 and 2012, which comes from both the earning of price increases and lower claim cost inflation.”
But Hartwig noted last week that carriers have to do more than achieve price hikes in excess of loss cost trends. “We have not priced through, at this point, the persistently low level of interest rates and the lower level of realized investment gains,” he said, noting that total investment gains in 2012—from investment income and realized gains combined—were 16 percent lower than gains recorded by the P/C insurance industry in the years immediately preceding the financial crisis.
Explaining why insurers need “a couple of more years” of rate increases, he observed that interest rates are back where they were in the 1930s, 40s, 50s and 60s.
“In April, the 10-year [Treasury] hit its lowest point since 1930-something. While there’s always discussion about the Federal Reserve tapering and so on, that’s got us to a 10-year Treasury yield of about 2.1 percent. That’s maybe the inflation rate, but probably a money loser in real terms,” Hartwig said.
Hartwig continued: “I think this is not a dynamic that’s been fully appreciated. When carriers and brokers have to talk to customers, it’s not something they consider. A buyer of insurance understands catastrophe losses, higher medical costs, higher claim frequencies and severities, but they don’t understand the impact that persistently low interest rates have on the industry’s bottom line.”
“Investment earnings are second largest source of earnings on top line for insurers. That needs to be priced through,” he said.
He added: “That is a different dynamic. It takes a lot longer to do that than it does to price through an underlying loss cost trend.”