The market hasn’t turned yet

“The soft market is over and rate increases are being achieved across all classes of commercial business.” This is what a number of insurers appear to be saying and so it must be good news, mustn’t it?

Not necessarily. It can be argued that there are two flaws to the argument. First, it is highly questionable whether the industry is seeing a sustained level of increases in any class beyond motor. Second, taken in isolation, published rate increases are only part of the story. It would be naïve to take them at face value as evidence of rating strength increasing across a portfolio.

Few would argue that prices need to rise across all classes of business, or that most insurers desire rate increases. But what do front line staff do if they are getting mixed messages? It is undoubtedly difficult to achieve rate increases and protect the top line at the same time.

The situation is probably not helped by the apparent strength of most insurers’ headline results, although there has been much talk about the contribution of prior year releases to these numbers.

Sensible organisations will surely reserve cautiously in the early years, given uncertainty about ultimate outcomes, and you might expect positive run-off in the results. The acid test is to review these trends over time and see if there are any spikes that may be masking adverse trends in recent and current underwriting years.

These headline results may be part of the reason why we are seeing so little real evidence of rate strengthening in property and casualty. Sure, the worst performing cases may be carrying some increases, although even on these there will often be somebody willing to take a view. At the lower end there is also some evidence that modest machine-driven rate increases are sticking.

The story for mid to large corporates is different. Prices do appear to be bottoming out but there is no evidence to date, at least not front line trading evidence, of rates increasing. There is plenty of rhetoric but this is patently not converting into actual behaviour. There are some subtle yet encouraging signs that a hardening of rates is not far away, but let’s not kid ourselves that we are there already.

“It won’t be immediately apparent in the headline results but a key underlying driver of performance will be how the quality and the price of business written today
compares with business being lost. Only time will tell.

Simon Cooter

The good news is that the market does genuinely appear to be seeing sustained rate increases in commercial motor with, in our experience, rate increases carried in each of the past 10 months.

The second part of the argument, the use of rate increase statistics as the ‘be all and end all’ of overall rate strength is nonsense. On the face of it, achieving rate increases across a portfolio of, say, 12%, sounds impressive. However, it depends on the make-up of the portfolio. It’s not so clever if the cases being retained are running at an average combined ratio of 120%, while the ones being lost are running at 80%.

Another dynamic at play is the approach to new business. It won’t be immediately apparent in the headline results but a key underlying driver of performance will be how the quality and the price of business written today compares with the business being lost. Only time will tell.

In reality there are a number of measures that need to be looked at together to give a true picture of overall rating strength.

So, although the much heralded return to sensible market conditions looks to be within reach, we’re not there yet. It will be interesting to see whether the words get turned into reality in the coming weeks and months, or whether it will take another event to trigger the turn. IT

‘Simon Cooter is distribution director at Brit Insurance.