profitability for commercial property whilst others looked to ... as CORs improved from 117% to 113% - but the property
Property Insurance Market Insights The predictably unpredictable property market The local and global insurance market finds itself at a pivotal moment with a balance between diminishing profitability and
Median Property Rate Movement – (Large) Corporate Segment
eager capital providers hungry for diversification. As 2017
7.00%
developed, each insurer looked to address this challenge in
6.00%
their own way with a more diverse view on target business, capacity deployment and pricing adequacy than we had seen
5.00%
for some time. Whilst the start of 2018 has seen alignment of
4.00%
thought on target business, the way in which capacity and
3.00%
pricing is viewed continues to differ significantly by carrier.
2.00%
In early 2017, two distinct market segments emerged. More established domestic players were desperate to return to profitability for commercial property whilst others looked to take the opportunity to build market share.
6.53% 5.56% 4.66% 3.77%
1.41%
1.00% 0.00%
Q3'16
1.05%
Q4'16
Q1'17
Q2'17
Q3'17
Q4'17
It was anticipated that post 30th June, the rate movement seen
The exhaustion of reserve releases, reduced premium volumes,
in early 2017 would start to stabilise and become far more
larger insurer net retentions, low interest rate environments, and
driven by risk quality and insurer risk selection, rather than a
frequency of loss activity have all led to combined operating
more generic response. The data suggests that hypothesis
ratios (COR) consistently above 100% versus a target of 85% -
came to life with more hazardous occupancies seeing
90%. According to APRA, some ground was made in FY 2017
significantly larger increases in late 2017 and early 2018.
as CORs improved from 117% to 113% - but the property
In addition, however, we also saw a rate movement in Q4
segment remains unprofitable for the majority.
2017 and early Q1 2018 tracking above the June quarter
Even before the recent natural catastrophe events in the USA,
for both the mid-market and large corporate segments
Caribbean and Mexico, many argued these forces should be
and across all occupancies. This is heavily driven by the
driving a significant correction in the market.
recent natural catastrophe events in the US and a more
How successful have insurers been in driving premium rate movement?
challenging reinsurance landscape. Insurer risk selection is becoming far more difficult to read. We are clearly seeing a reduction in capacity for property in
Median Property Rate Movement – (Mid-market)
more hazardous geographies and occupancies - but insurer
10.00%
views on these exposures are polarised as some look to take advantage of the retreat by their peers. Some areas - like 8.21%
8.00%
sector with exposure to expanded polystyrene sandwich
6.99% 6.43%
waste management and elements of the food & beverage (EPS) panelling - are finding it far more difficult to attract
6.32%
6.00%
insurance capacity. Insurer willingness to drop premium volume to reduce
3.79%
4.00%
volatility in their portfolios is gaining pace across a 2.00%
number of product lines. This is leaving some buyers with 1.34%
diminishing choice.
0.00%
Q3'16
Q4'16
Q1'17
Q2'17
Q3'17
Q4'17
So how are global events impacting the market in Australia? After a benign 5 year run of global natural catastrophe losses, the back end of 2017 has proven to be costly for insurers and reinsurers with a string of earthquakes, typhoons and hurricanes. 25/08 18/09 Hurricane Harvey Hurricane Maria 08/08 $30billion $30billion 07/09 Jiuzhaigou China Chiapas Mexico Earthquake
06/07 Masarayao Philippines
AUG
JULY
OCT
SEPT
19/09 06/09 23/08 Typhoon Hato, Hurricane Irma Puebla Mexico Earthquake $32billion South China September Californian Wildfires
21/07 Bodrum Turkey Earthquake
Based on current estimates, 2017 will be the second most costly natural catastrophe loss year in history, although it wouldn’t take much of a shift in current estimates to see the year setting a new benchmark. 250
USD Billions
200
150
137
129
134
100 75
62
50 19
18
0
33
30
29
52
51
51
56 43
30
19
38
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Impact Foreasting, Aon Benfield
Both insurers and reinsurers will feel the pain. Below is an illustration of the likely ability for insurers to cede losses to the reinsurance market. Estimate of Insured Loss (USD billions)
Estimate of Ceded Loss (USD billions)
124.50
88
64.5
60
47.8
45
41 33
31 22 6.2 Low
53
9.3 Medium
US
12.5 High
22.5
18
12 Low
Medium
32
High
Caribbean + Puerto Rico
Low
Medium
Total
High
Based on current levels, these losses remain an earnings event rather than a capital event. This will be the first major test for the collateralised reinsurance market, although the underlying capital position remains very strong. This said, the industry is starting from a different place after many years of heavy discounting and there is a strong appetite for correction. Some early indications suggest that the estimated incurred loss ratio for US property catastrophe retrocessional writers will exceed 400% in 2017; and Lloyd’s posted a mid-year combined ratio estimate of 100% suggesting that the year-end figure will be significantly higher. Non-traditional capital which now underpins much of the US reinsurance/retrocession market, has been severely impacted and much of this capital was “trapped” under their collateral arrangements delaying many treaty renewals. This capital was replenished and indeed added to giving reinsurance buyers an easier than expected renewal outcome. Whilst pricing increased across the board, not to expected levels. This pricing expectation has now started to fuel further M&A activity. Recent announcements by AIG and AXA of their intentions to acquire Validus and XL Catlin are just two examples of a companies looking to take advantage of a changing market environment.
Where to from here? Is the traditional market cycle a thing of the past? The diagram below shows changing factors that influence the market pricing and capacity. There is no doubt that we have seen a prolonged period of falling rates and diminished insurer profitability, it is likely that this mounting pressure will accelerate the ability for insurers to drive premiums in the short term. However, we estimate this will be short lived as the factors leading to the current conditions remain largely in place and any signs of rate improvement will be followed by an increase in available capital and capacity.
Competition increases and rates/premiums start to fall
Increased investment in insurance produces more capital & capacity
Improvements in insurer profitability and combined ratios
Poor Insurer profitability & unsustainable combined ratios
Insurance Market Transition
Upward pressure on rates and premiums
Increased focus on individual risk underwriting performance
Factors fighting and delaying the push for increases: •
Low interest rate environment
•
Pensions funds are comfortable with lower yields compared to traditional investors
Factors contributing to rate increases: •
Combined ratios have become unsustainable & continue to deteriorate
•
Global natural catastrophe losses have had a major impact market-wide
•
Focus on remediation and 'profitable growth'
It is unlikely that this will lead to pricing reductions in the medium term, but will undoubtedly be a stabilising factor for many parts of the sector. This said, we envisage that the current risk selection pressures will continue to drive insurer behaviour and less desirable occupancies and geographies will see pricing and capacity pressure for some time yet.
Recent changes by the ARPC that may affect your insurance premium The government-run Australian Reinsurance Pool Corporation (ARPC) have updated their postcode tier classifications following a recent review. This means that the tier your property falls under may have changed, which could impact the rate of reinsurance pool premium paid as part of your commercial property or business interruption insurance.
A quick snapshot of the changes The postcode classification adjustments took place on 1 January 2018, based on up to date population statistics. They can be summarised as follows: Newly classified urban region Toowoomba and Cairns now meet the definition of an urban area. Therefore one postcode in Toowoomba and five postcodes in Cairns that were classified as Tier C have been reclassified as Tier B postcodes. New urban fringes 61 postcodes at the borders of urban areas that are now undergoing substantial development, have been reclassified as Tier B. The most notable changes are south of Perth where the Rockingham area has now been included. New postcodes There are 13 new postcodes that have now been classified. Please note that the University of Adelaide has now been given its own postcode which is classified as Tier A. Corrections The tier for five postcodes has been revised. This includes adjusting university postcodes from Tier C to Tier B, attributed to their location. The full list of postcode tier classification changes can be accessed from the ARPC website.
ARS0294 0318
Contact Ben Rolfe Chief Operating Officer - Broking +61 2 9253 7452
[email protected] 