The “perfect storm” conditions for commercial rate increases

The past few years have created a perfect storm leading to an increase in commercial insurance rates, Signature Risk Partners Inc. says in a white paper released last week, entitled Hard Commercial Insurance Market on the Way.

One factor is that global catastrophe losses hit US$160 billion in 2018, according to Munich Re. Out of this total, US$80 billion were insured losses.

“Approximately 50% of the global losses were insured, compared to the long-term historical average of only 28%,” said Ashley Chinner, senior vice president and director of golf at Signature Risk (which creates and markets custom insurance programs). These additional claims have hit the insurance market, which has to take in the losses.

The frequency of severe weather has also “definitely increased” over the last 15 years, added James Grant, president and CEO of Signature Risk. “Even if a global insurer diversified its property exposure around the globe, it still got hit everywhere. It takes time for those events to get absorbed through the marketplace, but eventually it gets passed down to the policyholder in the form of higher premiums.”

Meanwhile, insurers have been aggressively expanding and seeking growth opportunities through mergers and acquisitions and capital expenditure. But due to the strong global economy, which has led to rising interest rates in many regions, operating expenses have gone up and now the cost of capital is also putting pressure on insurer earnings.

“Carrying the debt for past acquisitions while running an office in a big centre like the U.K. or Toronto means that expenses are up everywhere, and that’s a major factor that goes into rate calculation,” Grant said.

Technology also plays a larger role, providing underwriters with more information on flood exposure and risk forecasting. This has resulted in better actuarial models, often leading to increased rates. “Each of these factors on its own might be manageable,” the white paper said. “With all of them combined, it means one thing for insureds: commercial rates are going to rise and the days of insureds being able to shop for better terms may be coming to an end.”

Grant calls the culmination “a wake-up call. They may not be able to get a lower price. They may not be able to get terms, period, which is really scary.”