Market update: P&C
Written by Jon Guy
The spate of major losses of earlier this year badly dented underwriting performance in property/casualty. Jon Guy takes a look at the market
On face value the global property/casualty insurance market has not been having too bad a time of it in the past year. A fairly catastrophe free 2009 had enabled the market to rebuild the reserves that were so badly affected by the fall in the global equity markets and the levels of investment returns in the preceding 18 months.
Five months in, and the picture for 2010 looks a little less rosy. The hangover from the global financial meltdown saw underwriters unable to drive premium levels on the back of lower business volumes meaning the results – while an improvement – still paled compared with those of 2007. The multiple catastrophe losses experienced in 2010 are already beginning to make their presence felt.
Reinsurer Swiss Re’s Sigma research operation revealed that natural catastrophes and man-made disasters cost insurers US$26 billion in 2009. Of the 133 natural catastrophes and 155 man-made disasters that occurred, only six events triggered insured losses in excess of US$1 billion.
Historically, catastrophe losses have been highly volatile, with a strong upward trend. In US dollars, the historic upward trend for global insured losses is around ten per cent, and is driven by higher income, increasing wealth, a higher value concentration of wealth in loss prone regions and a trend towards more insurance coverage.
The US, which remains the world’s largest non-life insurance market, saw P&C underwriters deliver a significantly better performance last year. Figures released by the Insurance Services Office and the Property Casualty Insurers Association of America (PCI) showed private US property/ casualty insurers’ net income after taxes rose to US$28.3 billion in 2009 from US$3 billion in the previous 12 months.
Key to the result was the fall in claims. Net losses on underwriting fell by US$18.1 billion to US$3.1 billion in 2009 from US$21.2 billion in 2008, as claim costs (loss and loss adjustment expenses) dropped US$31.3 billion.
However, PCI president and chief executive officer David Sampson, warned that insurers’ recovery from the recession and financial crisis remained incomplete, with their US$28.3 billion in net income for 2009 being less than half of the US$62.5 billion for 2007.
Net written premium growth has been negative for three consecutive years, falling to a new record low in 2009, said the report. Data extending back to 1959 indicates that the previous record lows were -1.3 per cent in 2008 and -0.6 per cent in 2007 and that, prior to recent declines, net written premiums rose every year through 2006.
“The 3.7 per cent decline in net written premiums last year reflects the lingering after effects of the recession and crisis in the financial system. The latest data shows the nation’s real gross domestic product [GDP] fell 2.4 per cent in 2009, with total private sector employment falling 5.2 per cent and private sector wages and salaries dropping 5.4 per cent. Moreover, sales by retailers, including restaurants and other food services, dropped 6.3 per cent,” said the report.
“All of this reduces demand for insurance. And with insurers battling one another for shares of a smaller economic pie, market surveys indicate the recession contributed to softening in commercial insurance markets. For example, the Council of Insurance Agents and Brokers’ fourth-quarter 2009 market survey indicates commercial premium rates declined an average of 5.6 per cent for all sizes of accounts.”
It continued: “While the 101 per cent combined ratio for 2009 compares favourably with the 104 per cent average combined ratio for the 50 years from 1959 to 2008, today’s low interest rates and investment yields mean insurers must now post significantly better underwriting results just to be as profitable as they once were,” said Sampson. “For example, in 1986, insurers achieved a 15.1 per cent overall rate of return with a combined ratio of 108.1 per cent. For 2009, insurers’ annualised rate of return was just 5.8 per cent, even though the combined ratio was seven percentage points better.”
Broker Marsh issued a study in May which showed that UK and European financial institutions were cutting the level of liability insurance they purchased as they sought to cut costs at a time when there was an expectation that claims would increase as shareholders and investor sought ways in which to recoup lost investments.
On prospects for the year ahead, rating agency AM Best said they expected further pressure on premiums as underwriters chase market share.
“Although improved in 2009, AM Best expects the industry’s return measures to be strained through 2010, given sustained competitive market conditions,” said a spokesman. “An anticipated sluggish economic recovery, low interest rates, uncertain levels of future investment returns and the likelihood of higher catastrophe losses.”
While the earthquake which struck Haiti caused devastating loss of life, the insured values were relatively small. The same cannot be said for Chile’s earthquake, Europe’s windstorm Xynthia and the loss of the semi-submersible rig Deepwater Horizon which is on course to become the most expensive single loss in history for the energy market.
Prospects for the rest of the year don’t look good as a result and already underwriters are attempting to push up property/casualty rates as they seek to insulate themselves from the claims to come.
Speaking on the prospects for catastrophe losses in 2010, Thomas Hess, chief economist at Swiss Re, said: “The probability that we see nat cat losses as low as those in 2009 is less than 35 per cent. The industry is therefore well advised to prepare for much higher losses. Given their high volatility, losses could easily be three to five times what they were in 2009. In 2005, insured losses set a record when they soared to US$120 billion. I would not be surprised if this record is broken in the not too distant future.”
The major underwriters have been reporting their first quarter interim results and all have said their efforts, while encouraging, have been badly hit by the cost of the claims already made. To put it in perspective, the global energy market’s predicted premium income for 2010 excluding Gulf of Mexico windstorm risks has been put at US$2 billion. Depending on which underwriter you talk to the prediction for the insured loss from the Deepwater Horizon explosion is put at anything from US$1.6 billion to US$3.5 billion – effectively wiping out their entire global premium in one incident.
Stephen Catlin, chief executive of insurer Catlin Group, said: “The rating environment remains good overall, although there is negative pressure on pricing in certain areas of the portfolio. The volume underwritten by our London hub [in the first quarter of the year] decreased as intended, but each of our non-London underwriting hubs recorded strong increases in gross premiums written, supporting the Group’s decision over the past several years to invest in these hubs.
“So far this year, the property/casualty insurance market has witnessed two exceptional losses: the Chilean earthquake, which is one of the most devastating earthquakes in the past century, and the Deepwater Horizon oil rig disaster, which is the largest energy market loss in more than 20 years.”
He said that, despite the losses, he was optimistic: “Whilst large, these are the types of losses for which policyholders purchase insurance, and we anticipate that these two losses will have a positive impact on pricing and demand for coverage over time. Based on this expectation, along with the overall level of rate adequacy and the underlying performance of our business during the first quarter, Catlin looks ahead with confidence.”
Catlin reported that average weighted premium rates increased by 0.5 per cent across the group’s entire portfolio of business during the first quarter of 2010, compared with a six per cent increase in average weighted premium rates at 31 March 2009. Average weighted premium rates increased by 1.0 per cent for catastrophe-exposed business classes and increased by 0.4 per cent for non-catastrophe classes during the first quarter of 2010.
Swiss Re said its first quarter performance had been impacted by the hefty property/casualty losses reported. Chief executive officer at the firm, Stefan Lippe, said: “In the first quarter of 2010, we continued to deliver strong underlying performance, even though the result was impacted by high natural catastrophe losses, mainly from the earthquake in Chile and Europe’s windstorm Xynthia. While natural catastrophes like these can contribute to earnings volatility, protecting our clients against such extreme events is the essence of our business model.”