Market forces will decide prices
Premium rises in the general insurance market are patchy. This observation is unlikely to shock or amaze. Right now the entire financial world is patchy.
It’s the kind of world where McDonald’s can raise the price of its hamburgers in the midst of a global economic crisis because its products are in particular demand. It’s market forces in action.
Insurance products aren’t cheeseburgers, yet few would deny market forces in the various insurance sectors are deciding ultimately what gets more expensive.
Higher rates are being seen in some classes. But at this point it’s hard to see higher premiums filling the profitability gap created by falling investment returns and reduced levels of business activity. And let’s not forget claims.
“Patchy” is how JP Morgan and Deloitte saw the Australian general insurance market when they released their annual survey in January.
Profitability, they concluded, would be squeezed in the short term by the effects of the financial crisis on both claims and falling yields.
Aon Australia’s National Manager Market Services, Ross Castle, describes the market as “touchy” – and “patchy”.
“I can give you examples of double-digit rate increases of 20-30% and I can give you many more examples of renewals at expiring rates, and plenty of examples of further discounting,” he told insuranceNEWS.com.au.
“The increases are occurring in loss-affected accounts and classes where they are exposed to catastrophe risks. And there are some significant capacity accounts that are heavily reliant on reinsurance.”
He says an example of the lift in premiums is some of the directors’ and officers’ (D&O) areas, but it’s for very large publicly listed companies – particularly financial institutions and those requiring significant capacity.
“In saying that, we’re doing a top 100 company’s cover at the moment, and that will be very close to the expiring rate at renewal. That again is an example of it being quite patchy. We’ve had one major hospital account where there was further reduction.”
Property is seeing rate increases, while liability is being discounted due to low claims activity and good profitability levels.
“The fact is there is still plenty of capacity around and plenty of insurers that are still hungry for premium growth, given ongoing competition,” Mr Castle said.
“I think most people can understand that rates need to be adjusted marginally. Any rate increase needs to be clearly justified. It’s not hard to justify rate increases where there is significant loss activity or exposure to certain catastrophe zones.”
In Albany, WA, South Coast Insurance Brokers Director Nathan Hadlow says he’s seeing domestic rates firming by between 10-15%, in line with the storm events and broader cover that most policies are offering.
“Commercial motor and motor is definitely hurting the underwriters,” he said, citing rises of 5-10%.
“We write quite a bit of farm business, and I think some of the rural underwriters are certainly looking at their books. Their increases are 5-10%.
“But in the SME market I haven’t seen a lot of pricing pressures to date. Possibly some discounting has been removed but I’m not seeing the same increases that we’re seeing in domestic. And we’re not seeing increases in liability, either.”
At Willis, Australasian Placement Services Director Tony Barber says the market is generally showing signs of moving up.
“The more complex risks will start to feel the pinch,” he said. “The March quarter has been okay. Later in the year we’ll probably expect to see rates increasing.”
He says D&O Side A and B cover is seeing some slight increases, but Side C is starting to push through with rises of 15-25%.
“In property it’s up to 5% on reasonable risks with low claims activity and a reasonable response to risk management,” Mr Barber said. “There are bigger increases outside that in industries like food and beverage, due to the combustible nature of the storage.”
He says with capacity starting to come out of that market – that is, some insurers are declining to quote – pricing pressure is pushing rates up 10-30%.
“Mining is not good,” Mr Barber said. “Because of the losses in the sector the numbers are quite significant. With some of the players coming out there are increases of 10-30% or even 50%, depending on the risk.”
So, the market is indeed mixed – patchy, in fact.
Insurers once would have imposed across-the-board increases until the market again became profitable. But increasingly sophisticated measurements of individual classes of business – and individual clients’ risks – means the road to profitability this year will indeed be patchy.
Competition is also still very tough and capital is available – enough to keep the market careful in the way it raises premiums.
So to put it simply, if you’ve got a lousy risk, or you’re buying cover in a market sector that’s experiencing increased claims activity, expect rises. And you should also expect fewer insurers to be interested in higher-risk business – and those who do quote will be wanting higher premiums.
Maybe setting premium rates really is more complex than selling hamburgers. But as long as market forces prevent drastic rises, expect the hardening to be gradual and reasonable. And maybe some product innovation will keep things interesting, too – there are plenty of ways insurers can make individual products more friendly and flexible.
After all, McDonald’s makes a lot of money selling French fries along with the burger.
It’s the kind of world where McDonald’s can raise the price of its hamburgers in the midst of a global economic crisis because its products are in particular demand. It’s market forces in action.
Insurance products aren’t cheeseburgers, yet few would deny market forces in the various insurance sectors are deciding ultimately what gets more expensive.
Higher rates are being seen in some classes. But at this point it’s hard to see higher premiums filling the profitability gap created by falling investment returns and reduced levels of business activity. And let’s not forget claims.
“Patchy” is how JP Morgan and Deloitte saw the Australian general insurance market when they released their annual survey in January.
Profitability, they concluded, would be squeezed in the short term by the effects of the financial crisis on both claims and falling yields.
Aon Australia’s National Manager Market Services, Ross Castle, describes the market as “touchy” – and “patchy”.
“I can give you examples of double-digit rate increases of 20-30% and I can give you many more examples of renewals at expiring rates, and plenty of examples of further discounting,” he told insuranceNEWS.com.au.
“The increases are occurring in loss-affected accounts and classes where they are exposed to catastrophe risks. And there are some significant capacity accounts that are heavily reliant on reinsurance.”
He says an example of the lift in premiums is some of the directors’ and officers’ (D&O) areas, but it’s for very large publicly listed companies – particularly financial institutions and those requiring significant capacity.
“In saying that, we’re doing a top 100 company’s cover at the moment, and that will be very close to the expiring rate at renewal. That again is an example of it being quite patchy. We’ve had one major hospital account where there was further reduction.”
Property is seeing rate increases, while liability is being discounted due to low claims activity and good profitability levels.
“The fact is there is still plenty of capacity around and plenty of insurers that are still hungry for premium growth, given ongoing competition,” Mr Castle said.
“I think most people can understand that rates need to be adjusted marginally. Any rate increase needs to be clearly justified. It’s not hard to justify rate increases where there is significant loss activity or exposure to certain catastrophe zones.”
In Albany, WA, South Coast Insurance Brokers Director Nathan Hadlow says he’s seeing domestic rates firming by between 10-15%, in line with the storm events and broader cover that most policies are offering.
“Commercial motor and motor is definitely hurting the underwriters,” he said, citing rises of 5-10%.
“We write quite a bit of farm business, and I think some of the rural underwriters are certainly looking at their books. Their increases are 5-10%.
“But in the SME market I haven’t seen a lot of pricing pressures to date. Possibly some discounting has been removed but I’m not seeing the same increases that we’re seeing in domestic. And we’re not seeing increases in liability, either.”
At Willis, Australasian Placement Services Director Tony Barber says the market is generally showing signs of moving up.
“The more complex risks will start to feel the pinch,” he said. “The March quarter has been okay. Later in the year we’ll probably expect to see rates increasing.”
He says D&O Side A and B cover is seeing some slight increases, but Side C is starting to push through with rises of 15-25%.
“In property it’s up to 5% on reasonable risks with low claims activity and a reasonable response to risk management,” Mr Barber said. “There are bigger increases outside that in industries like food and beverage, due to the combustible nature of the storage.”
He says with capacity starting to come out of that market – that is, some insurers are declining to quote – pricing pressure is pushing rates up 10-30%.
“Mining is not good,” Mr Barber said. “Because of the losses in the sector the numbers are quite significant. With some of the players coming out there are increases of 10-30% or even 50%, depending on the risk.”
So, the market is indeed mixed – patchy, in fact.
Insurers once would have imposed across-the-board increases until the market again became profitable. But increasingly sophisticated measurements of individual classes of business – and individual clients’ risks – means the road to profitability this year will indeed be patchy.
Competition is also still very tough and capital is available – enough to keep the market careful in the way it raises premiums.
So to put it simply, if you’ve got a lousy risk, or you’re buying cover in a market sector that’s experiencing increased claims activity, expect rises. And you should also expect fewer insurers to be interested in higher-risk business – and those who do quote will be wanting higher premiums.
Maybe setting premium rates really is more complex than selling hamburgers. But as long as market forces prevent drastic rises, expect the hardening to be gradual and reasonable. And maybe some product innovation will keep things interesting, too – there are plenty of ways insurers can make individual products more friendly and flexible.
After all, McDonald’s makes a lot of money selling French fries along with the burger.