Insurers, Buyers Benefit from Generally Stable, Predictable Market

Multicolored and Multilayered Bar Chart Illustrating Many Varying Entities and Levels Against a Black Background

October 04, 2023 |

Multicolored and Multilayered Bar Chart Illustrating Many Varying Entities and Levels Against a Black Background

Property-casualty insurers reported strong results during this year's second quarter as they benefited from continued growth in net written premiums and investment income, according to the latest quarterly Lockton Market Update.

Meanwhile, a resilient US economy has made the property-casualty insurance market relatively predictable for buyers across most lines of business, the September 2023 Lockton report says.

The exception to that trend is property insurance, Lockton says, where prices continue to increase as insurers respond to inflation, natural catastrophes, nonmodeled losses, and reinsurance market pressures.

The report, titled "Property and Inflation Continue To Dominate Headlines," notes that the first 6 months of this year saw $50 billion in global insured natural catastrophe losses, the second largest total since 2011.

Meanwhile, the impact of severe convective storms continues to grow, with the peril responsible for 10 events in the United States causing more than $1 billion in losses during the first half of 2023, making severe convective storms the leading cause of US insured losses during the period. Losses from those first-half severe convective storms in the United States totaled $34 billion, 68 percent of the first-half global insured natural catastrophe loss total, Lockton says.

"While conditions have generally remained predictable for primary buyers across most major lines, property remains the outlier," the Lockton report says. "This is in part because of inflationary challenges along with elevated catastrophe activity and the impacts of climate change."

Reinsurance market pressures are also affecting the property market, Lockton notes. "After suffering significant losses from 2017 through 2022, reinsurers have refocused on profitability in 2023," the report says. "Rate increases, higher attachments, and tighter terms and conditions have helped make 2023 a stronger year for reinsurers."

Those factors have shifted higher costs and volatility to the balance sheets of primary property insurers, Lockton says. In turn, those insurers have become more selective and disciplined in deploying limits and setting prices, according to the report.

"The new reality is that even those property buyers with limited catastrophe exposures and favorable loss histories are renewing with rate increases of at least 10 percent," the report says.

Aside from the challenges in property, insurers are aware of warning signs in other lines, Lockton says. Among them are rising severity and prior-year loss development in liability insurance. Those conditions are beginning to renew pressure on third-party liability rates, the report says.

Social inflation remains an issue for liability insurers, the Lockton report says. Insurers continue to report adverse loss development for prior years, in particular the accident years 2015 through 2019 for both commercial and personal auto and occurrence-based general liability and umbrella policies, Lockton says. "This reflects the challenges insurers have had in accurately predicting losses associated with long-tail policies," the report says.

Workers compensation remains a highly profitable line for insurers while market conditions also remain favorable for buyers, Lockton says.

While at the start of the year some market observers expected pressure on workers compensation rates based on concerns over medical inflation and the possibility that a recession would reduce insurable payrolls, in fact medical inflation in workers compensation has lagged medical inflation in group health plans and overall headline inflation, the report says. Meanwhile, insurers' strong investment income has helped keep workers compensation pricing stable for buyers and the line profitable for most insurers.

Pricing for directors and officers (D&O) coverage is competitive, according to the report, though there are warning signs emerging in the D&O market.

The cyber-insurance market remains competitive, the Lockton report says, with many cyber insurers remaining focused on aggressive growth. Insurers are also making higher cyber limits available, Lockton says, and in some cases showing a willingness to negotiate terms and conditions.

The Lockton report suggests that given future economic uncertainty, many insurance buyers are looking to take advantage of the relatively competitive conditions in many insurance lines. That can involve locking in favorable renewals early, seeking expanded capacity, or reconsidering earlier decisions to reduce limits.

As they make their decisions, insurance buyers are increasingly relying on analytics and considerations surrounding the cost of capital, Lockton says.

For multinational insurance buyers, there are both evolving opportunities and risks resulting from the increasingly interconnected global macroeconomic and political environment, Lockton says. Many of those organizations are looking more closely than ever at their global footprints and supply chains, the report says.

At the same time, financial market responses to global risks are affecting how property-casualty insurers deploy their capacity, prompting organizations to be more deliberate and strategic in managing risks on a global basis, according to Lockton. The report cites several themes emerging among organizations as they look to manage global risks.

  • Weighing centralization versus decentralization of insurance purchasing
  • Transparency into the global cost of risk
  • Complying with in-country regulations
  • Meeting global contractual obligations
  • Considering environmental, social, and governance frameworks

In general, however, despite several potential warning signs, insurance buyers can continue to expect relatively predictable conditions across most lines, other than property, Lockton says.

"Insurance company leadership is generally content with their companies' portfolios after years of program adjustments, reduced capacity, improved terms and conditions, and increased pricing, and most insurers are looking for orderly growth," the Lockton report says. "Risk selection and program design remain paramount, however, as insurers try to keep pace with underlying loss trends that are escalating at a faster pace than general inflation."

While property-casualty insurers are currently enjoying strong results, the Lockton report cites several warning signs facing them as well. Among them is that while higher interest rates have boosted insurers' investment returns, they have also raised insurers' cost of capital and the returns required by shareholders and debt holders.

In addition, insurers have seen their combined ratios deteriorate over the past year as a result of natural catastrophe losses in property, adverse loss development in liability, and continuing challenges in personal lines, Lockton says.

October 04, 2023