2015 was a year of continual rate decreases in Property. All indications show the market will continue to be very competitive into 2016. While many factors impact the market cycle, two factors could relatively quickly halt the slide in rates:
- Large-scale event with significant impact on insurers’ financial results
- Mass reduction in available capacity
Starting with the latter, it does not appear that limited capacity is going to be an issue. 2015 showed new capacity entering the marketplace and increased capacity or expansion into the U.S. from existing insurance companies. In years’ past, new markets entered to take advantage of higher property rates while filling a void in needed capacity; think the Bermuda Class of 2001 and 20051, post-9/11, and post-Katrina, respectively.
The influx of capacity throughout 2015 appears to be an attempt to diversify or gain market share during this downturn. Ultimately, it did nothing more than increase competition for an already saturated marketplace, thereby supporting the expectation of a continued soft market.
Assuming capacity remains abundant, then hardening of the market will likely depend on a large-scale event occurring. What this event might be is anyone’s guess.
While it is likely the market-changing event will be a natural catastrophe in the U.S., the questions remain:
- How large of an event will turn the market?
- Will another Katrina move the needle or will it have to be a $100B hurricane loss or a $150B New Madrid earthquake event?
- If an event of this magnitude occurs, how long will a hardening market sustain itself?
- What happens if a series of smaller events occur?
Only time will tell.
It is unknown whether the industry will ever truly experience a market-wide cycle change as was experienced after 9/11 or Hurricane Katrina. After each of these events, capacity simply wasn’t available in many cases, regardless of pricing. I don’t think it is out of the realm of possibility that the industry may be destined to have only “micro” market cycle changes – where there is hardening in the market only in certain geographic areas, for certain perils, or for certain classes of business.
Have micro-hard market cycles become the new normal? While we can only speculate, one can certainly argue this case when considering several major events that have occurred during the last 15 years. For example, insured losses from Hurricanes Ike and Gustav in 2008, Hurricane Irene in 2011, and Hurricane Sandy in 2012 were significant, but none had the wide-spread and lasting impact as what followed 9/11 and Hurricane Katrina.
In the meantime, give due consideration to maintaining relationships with incumbent insurers versus accepting new markets. Regardless of the choice, in addition to pricing, now is the time to consider improvements in terms and conditions within property insurance programs.
1 Bermuda Class of 2001 originally consisted of Arch, AXIS, Allied World Assurance, Endurance Specialty and Montpelier Re. Class of 2005 included markets such as Ariel Re, Hiscox, and Lancashire.