Will we ever see another hard market again?

Is the traditional hard market “broken”?

Insurance pricing cycles have all but evaporated over the past decade, with premium rates during this period showing an overall decline.

The trend is illustrated once again in the 2018 Risk and Insurance Management Society (RIMS) Benchmark Survey, which shows that the total cost of risk (TCOR) for North American companies declined by 3 per cent in 2017. In Canada, after dropping 3 per cent in 2016, average TCOR slid an additional 4 per cent last year.

Overall, in North America, this is the fourth consecutive year TCOR – which factors in premiums costs – has fallen. The 2017 decline happened despite record catastrophe losses in the United States.

TCOR is derived by adding up a company’s risk financing costs [including the cost of insurance premiums], loss costs [direct and indirect], administration costs and taxes and fees; this sum is expressed relative to the amount of company revenue.

For example, according to the latest RIMS benchmark survey, TCOR decreased from $10.07 per $1,000 of revenue in 2016 to $9.75 per $1,000 of revenue in 2017. In Canada, at $7.06, the average TCOR for Canadian companies in 2017 was significantly lower than for U.S. companies. TCOR in Canada was $7.38 two years ago.

Typically, a hard market cycle would follow major catastrophe losses of the like seen in the United States last year, with insurers raising rates and limiting coverage offerings to generate capital and offset rising claims costs. Collectively, Hurricanes Harvey, Irma and Maria are estimated to have cost insurers between US$75 billion and $US113 billion last year.

But Canadian and U.S. insurance markets haven’t witnessed a truly hard market since the World Trade Center buildings collapsed in September 2001, says David Bradford, co-founder and chief strategy officer for Advisen, a data, media and technology solutions provider for the property and casualty insurance industry.

TCOR has been steadily falling since 2013, to the point where the traditional market cycles may be perceived as “broken,” Bradford says. However, this may simply reflect a “new normal” resulting from a more efficient insurance market.

Asked to define an “efficient insurance market,” Bradford told Canadian Underwriter: “Better technology and the ability to sub-segment markets is one part. The more influential element is the ability to deploy capital quickly to address capacity shortfalls. We’ve seen this in the past when new Bermuda reinsurers were formed in a matter of months following big catastrophe losses. Also, alternative capacity like sidecars and cat bonds can quickly fill holes, which smothers rate increases driven by capacity shortages.”

The upshot of an efficient market, Bradford added, “is that a hard market like that last seen in 2001-02, when commercial insurance rates shot up 50 per cent, may simply never occur again. Prices may rise, but most likely they will be quickly beaten down by fresh capital flowing into the market. That is good news for risk managers.”

The marginal decline in TCOR last year was driven by decreases in property, liability, workers compensation, management liability, and professional liability costs, as well as overall risk management administration costs.

In Canada, following two consecutive declines, property costs rose by 15 per cent in 2017. This increase was driven by higher property insurance premiums and property retained losses.

Other key findings in the RIMS Benchmark survey include:

• A significant driver of lower TCOR was an 8 per cent drop in liability costs overall. In Canada, liability costs, the second largest component of TCOR, fell for the fifth consecutive year, ending at $2.26 in 2017.
• While TCOR per $1,000 of revenue fell for most industries, four – health care, government and nonprofit, information technology, and consumer staples – saw rising TCOR in 2017.

The percentage of companies buying cyber insurance has increased over the past seven years – from 35 per cent in 2011 to 65 per cent in 2017.