Brought to you by:

The ups and downs of premiums

Reports commenting on premium rates are often seen as primarily reflecting the publishers’ best interests. When brokers predict falling rates in a hardening market, insurers can be guaranteed to accuse them of viewing the market through rose-tinted spectacles.

Similarly, brokers are quite likely to shrug off reports from insurers that predict swift and sudden premium rises with the oft-quoted line, “They would say that, wouldn’t they.”

However, Aon Australia’s regular Commercial Insurance Market Update has earned a reputation for being pretty much on the money with its analysis of the circumstances surrounding market behaviour, and its report released last week is worth careful examination.

It sees softening in some classes and hardening in others, with greater focus by underwriters on pricing accurately. As market segments harden, accurate pricing should – for the time being at least – overcome insurers’ competitive urges.

Right now the insurance cycle is at the point where insurers are getting tougher on premiums because the economy is at a low point in the investment cycle.

But this time around a great deal of investment capital has flowed into reinsurance, a sector that’s performing well despite recent record catastrophes.

The Aon report says higher levels of reinsurance capital are likely to drive Australian property premiums lower this year, while commercial insurance markets exposed to global financial turmoil may experience less capacity and rising rates.

By the end of last year reinsurance capital had reached an all-time high of $US500 billion ($490 billion), up 3% on the year earlier, with increased capacity boosting competition in the property sector.

“Major insurers are trying to increase market share and valiantly trying to retain existing clients,” Aon National Manager Property Broking Ben Rolfe says in the report. “These factors should create improved market conditions for buyers during 2013.”

But the Aon report also acknowledges the variations in the market.

For example, general liability rates are widely considered to be at their low points and a harder market could result in insurers becoming more selective.

Further cuts in the official cash rate will also increase pressure on insurers to raise liability premiums to partly offset the loss of investment income.

“Most policyholders were able to renew at expiring or lower premiums in the last quarter of 2012, thanks to ongoing competition among insurers who were still trying to meet demanding budget targets,” Aon’s Placement Director – Casualty Bill Pavey says.

The lingering effects of the global financial crisis (GFC) and continuing economic turmoil in Europe continue to rattle the professional indemnity and financial institutions markets.

Professional industries are still reeling from the GFC, and financial indemnity insurance rates are rising for financial planners and property valuers, Aon says. New entrants into the industry are finding it difficult to obtain cover.

There is also rising concern in the financial institutions market that capacity may drop away as insurers avoid areas seen as relatively loss-exposed.

“The big unanswered question is, will we see a gradual market hardening and return to underwriting profit or a dramatic loss of capacity and ensuing market spike?” asks Eden Fletcher, Aon’s National Financial Lines Placement Manager.

“There has been little change in capacity over the past quarter for the majority of financial institutions clients; however, we have experienced capacity restriction for large banks with a global footprint, especially those with significant Eurozone exposure.”

In directors’ and officers’ liability (D&O), insurance against shareholder class actions contributed to the majority of high-value claims in the past five to 10 years, leading to diverging market trends.

Companies seeking class action insurance are paying much higher premiums compared with those buying traditional cover for directors only.

New entrants into the market and increased capacity should ensure competitive premiums for companies without class action cover and which “tick the boxes” for insurers, according to Aon.

“For firms with questionable corporate governance, debt concerns, unstable cashflow or exposure to shareholder claims, D&O insurers will require some convincing to become interested,” Placement Director – Financial Services Paul Smyth says.

Trade credit class insurers are holding their rates for good performers, while high claims are being punished with substantial increases, Aon says.

Workers’ compensation rates in underwritten states continue to be hard, with insurers indicating they will increase again in 2013, particularly in WA and the NT.

In New Zealand, the effect of the Canterbury earthquakes remains a key market driver.

The loss estimate has continued to rise, and upward pressure on reinsurance costs is flowing through into increased premiums and stricter terms.

The New Zealand Treasury has revised its estimate of the total cost of the Christchurch rebuild to $NZ40 billion ($33 billion) up from $NZ30 billion ($24.8 billion) last December.

“This has resulted in significant increases in earthquake insurance premiums for all sectors of the market across the whole country,” Aon says.

Available capacity has dropped for corporate property, particularly in high-risk zones in Wellington and Christchurch. Older buildings and those at risk are also coming under greater insurer scrutiny.

“Insurers are often withdrawing or restricting the type and amount of cover available on such properties,” the Aon report says.

Still, New Zealand corporate property premiums have started to level off after the significant rises of the past 18 months.

“Property premiums appear to be largely stabilising and we anticipate this trend will continue unless further substantial catastrophe losses occur,” Aon NZ Chief Broking Officer Angus McCullough says in the report.

With a range of factors adding pressure on the more predictable insurance cycle swings, brokers will be on their toes for the next year or so as the market moves forward.

With insurers employing sophisticated technology to analyse classes of business and pinpoint individual risks, their ability to accurately price risk is enhanced and the old hard market/soft market norms no longer seem to apply.