Commercial pricing needs to rise 5%, says Zurich

Zurich UK general insurance chief executive Steve Lewis (pictured) has said commercial insurance rates need to rise by at least 5% to just keep pace with claims inflation – and has warned dramatic price increases would follow if insurers continued to drop personal rates without reason.

He was speaking after Zurich unveiled a £21m increase in operating profits in the first half of the year, despite cutting gross written premium by 2.4% to £846m. Its COR improved to 94.5% (2012: 99%).

Zurich’s drop in premiums was because it cut back in personal lines – its commercial underwriting was level with the first half of 2012, Lewis said.

“Premiums are down, but that’s a function of discipline in the challenging economic conditions in which we write business. But the discipline bears fruit: operating profits are up, despite falling investment returns.”

Zurich increased commercial prices by an average of 5% in the first half of the year. “For me, that’s a minimum of what’s required to stand still,” Lewis said. “In some lines we’re carrying increases of 8%.”

Despite talking up a hardening market, Lewis said other insurers were not following through. “Let’s just say the alignment of rhetoric and action is a little patchy,” he told Insurance Times.

Lewis insisted Zurich could still grow despite writing less business in the first half. “We’re not here with a view of shrinking to greatness. We think we’re taking the right decision to balance volume and profit.

“Overall, I’m pleased with the result.”

Pre-emptive rates cuts

Lewis warned the industry had cut personal motor insurance prices to reflect the savings it expected from the Legal Aid Sentencing and Punishment of Offenders Act 2012 (Laspo) before the benefits were proven.

“We need a rational approach to come back to the personal lines market. Otherwise we’ll find ourselves, as we did at the end of 2009 and 2010, with a requirement for a significant price correction, which is in nobody’s interest.”

“The Laspo reforms will certainly have a positive impact, but we have to be careful – in no shape or form is the size of that benefit enough to correct profitability in the commercial space.

“I’ve seen one or two brokers in the market making comments around some pretty sizeable benefits that I wouldn’t even recognise,” he added.

Blame it on the sunshine

Zurich was the latest insurer to reveal an improvement in its combined operating ratio in the first half. Aviva’s combined operating ratio (COR) improved by 0.9 percentage points to 96.3% while RSA’s fell 7.5 points to 93.1%.

But Lewis warned the latest round of results were “genuinely heavily flattered” by benign weather conditions. “They’re not representative of longer-term sustainable returns for the industry. This is a market that still requires corrective pricing action.”

“In what is a 1 or 2 point yield environment, you need the whole commercial lines market to write at a sub-95% COR to make a 10% or 12% return on equity,” he said.

Zurich’s core trading performance was also helped by an improved expenses ratio. The insurer announced last year that it was making nearly 400 people redundant as part of a plan to transform its UK personal lines into a low-cost business.