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The Long Soft Market for Commercial Property Insurance Could Be over

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November 07, 2017

The Willis Towers Watson's Marketplace Realities 2018 report reveals that commercial insurance buyers are likely to face rate increases for 2018 insurance programs as the industry continues to tally losses following one of the most active and financially disruptive hurricane seasons in history. The report serves as a guide for North American property and casualty insurance buyers preparing for upcoming insurance program renewals.

As market reaction to recent natural catastrophe events continues to unfold, the report indicates underwriters will be pushing for rate increases as they reconcile what is expected to be a significant earnings hit for many, and for some a potentially material capital hit. For those underwriters who need to dip into capital to fund their losses, the pressure to raise rates to replenish that capital could be unyielding. For buyers, this may mean the long soft market for commercial property insurance could be over, at least temporarily, and there may be upward pressure on rates in other lines of insurance.

In introductory comments, Joseph C. Peiser, head of broking for Willis Towers Watson North America, urged organizations to begin preparing now for changing market conditions. "Now is the time for organizations to catalog the positive differentiators in their risk profile to set themselves apart from the pack at renewal time," he said. Mr. Peiser also recommends that insureds "define their risk tolerances so they know where their ceiling is" if rates and retentions spike.

In the property market, where there is a growing consensus that insured losses from recent catastrophes will exceed $100 billion, Willis Towers Watson experts "expect to see some type of market correction" after insurers have a chance to estimate their ultimate losses. However, the pricing impact to buyers will likely not be manifest until the first or second quarter of next year. There is still a high degree of uncertainty in forecasting price movement at this stage; however, rates are forecast to potentially rise 10 percent to 20 percent for catastrophe-exposed risks and 20 percent to 25 percent for catastrophe-exposed risks with recent losses.

Other property insurance buyers can expect flat rates or low single-digit increases, ending what for many buyers have been several consecutive years of annual decreases. Meanwhile, according to the report, several factors could dampen the upward pressure on rates, including still-abundant capacity and what experts view as "still eager" alternative capital providers. The broker will publish a supplement to the property section of the report once it has more visibility into the factors influencing market conditions.

Casualty rates, which had begun to drift downward for many organizations, are predicted to be flat or increase by small amounts as pressure from the recent catastrophe losses spills over into other lines of business. Auto rates for businesses will maintain their single-digit increases, while workers compensation rates are expected to be stable, moving one or two percentage points in either a positive or negative direction. For product recall—newly added to the Marketplace Realities 2018 publication this year to reflect growing interest in the product—Willis Towers Watson experts are predicting rates to range from –5 percent to +5 percent.

Despite the potentially broad impact of natural catastrophe losses, the report anticipates many of the specialty insurance lines of business to follow their own supply and demand curve. For example, the directors and officers (D&O) liability marketplace outlook is "not as soft," as underwriters are mindful of potentially adverse D&O claims activity and looking for ways to avoid compounding the year-over-year impact of declining rate. For terrorism insurance, buyers should expect flat renewals rather than the decreases they have seen in recent renewals. Meanwhile, in the environmental insurance market, the high double-digit increases for combined environmental-casualty programs have begun to ease.

The cyber liability insurance market remains robust with increased competition buoying market conditions. Demand for coverage continues to rise, and supply of capacity is "more than keeping up," according to the report. Despite a string of high-profile breaches, cyber insurance program renewals for both primary and excess cover are averaging only single-digit rate increases. Underwriters have offered premium decreases to organizations that are able to demonstrate increased levels of security and internal policy controls. Experts forecast rate increases of up to 5 percent for 2018.

Key Price Predictions 2018 Chart

The Marketplace Realities series is published in the fall and updated every spring. A copy of the full report is available free of charge on the Willis Towers Watson website, along with a video message from Mr. Peiser.
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