Allianz Insurance has confirmed that it is intending to put up commercial rates in 2008, and Royal & SunAlliance has dramatically increased its personal lines revenues, but does this activity indicate the start of a rates revival?
- Peter Longstaff, Chief underwriting officer, Zenith Insurance
- Ray Cox, Underwriting director, Brit Insurance
- David Grant, Head of sales and marketing, Equity Redstar
- David Sherman, Property underwriting manager, NIG
- Paul Maidment, South and London trading director, Allianz Commercial
- Paul Upton, Chief underwriting officer, Evolution Underwriting Group
- Mark Harris, National broker development manager, Fusion Insurance
David G: Many recognise that rates will rise in the market. Actions speak louder than words, and we have seen increases in the private car and household markets in the past few months. This movement hasn't occurred in the commercial motor and public liability areas yet, but there is no doubt that the market requires us to move forward.
Ray: This will only occur if organisations are prepared to bite the bullet on the potential ramifications on the top line versus bottom line. There is no doubt that rates need to go up in a whole host of areas. In the coming months, organisations will emerge that will be clear in their intentions to protect or improve the bottom line. However, there is a risk in the short term of top line detriment, and that will be the ultimate driver.
Mark: That's a prudent point. There will be a certain amount of people trying to test the water, and it's about who is prepared to take the pain in the short term.
Peter: The issue for me is the emergence of aggregators, and particularly Tesco, which has the financial clout to really hit the market - it will only increase the churn, as there will be less renewal retention. This is because aggregator sites provide an automatic renewal notice, which in the majority of cases will come up with a different insurer. Those buying from aggregators don't care about the identity of the underwriter. The big danger is that aggregators are going to increase competition at a time when rates need to rise.
Mark: Private motor, as it always has, is going to be the catalyst to drive that.
Paul U: There were two events that drove the opportunism of a hard market in the UK commercial property sector - one was 11 September 2001 and the other was the collapse of Independent. The huge hikes we saw then are not going to happen this time, unless there is something really unexpected down the road. It's up to insurers, either collectively or individually - it's not going to be imposed on them by macro effects, such as the cost of reinsurance.
David S: I agree. We've experienced three years of good results, achieved by great rates deflation and claims inflation. Last year's floods will have an impact, as they can be used as a catalyst to get things moving.
Ray: As an industry, we are always looking externally for someone to solve our problems. We can't keep waiting for an event that is going to change the world. We wait for something that is so bad that we have to respond. What happened to basic business principles? Making a good return on capital employed is not something that we should be embarrassed about.
Peter: I agree, but personal lines has become so commoditised that it is now about distribution and ownership of customers, and there are certain companies that are willing to make that money from the non-risk income, not underwriting profit. As a company that only deals with brokers, we have to be clever in order to obtain a good return on capital; the amount of business that you can write is dictated by how it is distributed. My concern is that aggregators and distributors will become so powerful that underwriters will be pressured once more into lowering price.
Ray: Is the situation really any different to when people talked about large brokers and direct writers and their influence? If you've got capital to use in writing insurance business, you can either make money or you can't. There are far too many people willing to write simply for volume. If there wasn't, we wouldn't be having this debate.
Peter: The point I'm making is that I don't believe there are too many insurers willing to write for volume. At the moment, most of the insurers we look at in terms of competitive analysis are increasing their prices, but these prices are not reaching consumers.
David G: Insurers and brokers have made the same mistake in the past by going for volume in a soft market, rather than getting their acquisition costs right against their renewal retention. They find that they are writing at a loss, and not getting the benefit of sell-ons or retention in years two or three. This could result in one or two players on the aggregator side suffering as well, because they haven't got their sums right.
Peter: That's my point exactly. Renewal retention will drop like a stone, and you've got acquisition costs to consider when replacing it. It will be the likes of Tesco that will win out of this situation, because they don't have to underwrite.
What about the credit crunch? If there is less capital floating around, will that make people bite the bullet in terms of rates?
Paul M: There will be no get-out-of-jail-free card with investment income - that's not going to solve anything. Several years ago, the major insurers said they would not let this happen again.
Ray: In addition, the longer this goes on, the worse the upside is going to be for clients. If we are not careful, we will have another 2002 in terms of dramatic price increases, and that causes more problems for the industry because it further destroys our credibility.
Paul U: Brokers have to manage their clients' expectations - it does not make sense for a broker to continue eroding its own income. A hard market is a broker's market, and they can make a significant amount of money. It is the responsibility of insurers to get the ball rolling, but you'll see a provincial broker writing business for 5% purely to acquire a client. I've spoken to many insurers, and they are trying to add 5% to 7% on all classes of business.
Ray: It must be very difficult for brokers to talk to customers because they are not only dealing with a dramatic change in price, there is also the changing appetite of insurers. In a soft market, you see some writing cover that you know they are going to refuse to write in the future. The credibility of the industry gets damaged.
Paul U: There also seems to be a lag at the moment on commercial pricing. Many new entrants are launching franchises that are built out of an original platform. There are foreign companies that have come into the UK with a very aggressive attitude. They don't have legacy issues on UK business, and are coming in with a fairly clean sheet of paper.
Mark: However, aren't there two sides to that argument? If you come in as a player in a soft market, you hurt the established players to a degree but to work for the capital, they need to play the game as well if they want to make an impact. They are not going to come in and take a stance on ratings.
Paul M: Based on a seven-year cycle, probably a third of a firm's staff - either in a brokerage or an insurer - do not understand the dynamics of the past market conditions.
Ray: Is there a danger that the industry will blame other factors, rather than taking responsibility for the situation? It is about our determination to say, 'hold on, our prices are now at a level where we simply can't make money'. If you consider the accumulative effect of three years - now heading into a fourth year of rate reductions of 10% and estimated claims inflation of 10% - the compound is a 20% reduction in profitability. The truth is that there are people knowingly writing business simply to get the volume, in the hope that one day there will be this magic occurrence where we start to recover. In reality, nothing is going to happen.
David G: Going back to the credit crunch, it will have a part to play in the changing market. It will focus the minds of private equity firms in regards to how much capital they want to put into insurers. It won't necessarily be the defining or overriding factor, but the credit crunch will play a part in trying to move that market forward.
Ray: What has disappointed me in the past four or five years is that we never wanted this to happen again, especially straight after the depths of despair in 2001. We were undertaking significantly more work around understanding capital, and the amount of capital needed to run a business in a more professional manner. What I really hoped was that this insight would start to drive out the excesses of competition.
Paul M: It will be very interesting to see who the winners will be in the next couple of years, because it comes back to underwriting quality, distribution relationships and the offering in terms of ensuring it is not just about pricing but risk management as well. There was a good measure of this in 2007 - in terms of people's market share, whether it is personal or commercial, what has been their share of the flood losses? You can see potential winners and losers.
Ray: One of the problems we have in the industry is that everything becomes focused on this 12-month cycle. I wonder whether the challenge for the industry is how it can start to offer more stability to clients.
Paul U: You could have a continuous contract, where there is a three-month break clause for each party, and each year the insurer has the ability to move the price of that risk during the currency of that agreement. Every 12 months, there is an auction for these risks - the blood bath seems to get increasingly worse every year.
David G: That is the ideal, but we are governed by the laws of supply and demand.
Paul U: The reason we don't do it is simply because no one does it.
Ray: The cycle is fascinating because it ends up with the dramatic over-reactions in price that we saw in 2002/03, which attracts people to the market - capital providers that believe they can make a fantastic return because profits have exceeded what is a reasonable return. If you were producing a more predictable level of return, the idea of capital flowing in and out quickly would be reduced. The cycle exacerbates itself.
Is the industry destined to wait for external pressures to push things along, or can it achieve this itself?
Paul U: It can, and it's trying. Every underwriting director and distribution director in the UK is trying to drive a climate where rates can improve. There are still a couple in the market who are legacy-free, and are prepared to write business at what we would call uneconomical terms. They can have a distortive effect, even if they just quote for business.
Ray: At the end of the day, the industry has the capability to solve its own problems - there's the ability, the data, the knowledge - but it is vital that the messages from the top of the organisation down to the front line are consistent.
David S: There is movement in terms of price, and where we've seen it moving we have seen it stick and business hasn't been affected by it. New enquiries have dried up, and when they do come through, it is in the form of distress business. In addition, when you get a piece you can quote on, you get savaged. Why, as an industry, do we work in this way?
Paul M: No one should be under any illusions that the pricing today is adequate for attritional losses. All we are doing is getting back to normality.
Ray: What we can be certain of is that in some areas, such as property, there are concentrations of value. Average claims costs are likely to go up by more than inflation.
What are your predictions for when the market will turn?
Peter: Personal lines has already turned, and it will continue in 2008 - possibly into 2009. The caveat I would add to that is pressure from aggregators in terms of forcing the price down due to competition.
Ray: We will start to see some increases in the first half of next year. Anything heading towards the numbers we really want is more likely to be at the back end of 2008, and into 2009. I don't think it will go up rapidly, as it will be more of a gradual increase than what was witnessed in 2002.
David S: In the commercial small to medium-sized enterprise market, we are seeing motor rates constantly moving up and sticking. We are starting to see it on property and liability as well. By the second half of 2008, I expect that most of the market will be in line. However, it should be emphasised that this can only be achieved by working in partnership with brokers. You've got to be talking to brokers, and explaining why it is necessary. In addition, you have to make it clear what their responsibility is in helping to turn the market.
Paul U: The 2007 floods were the final straw. The larger companies are bleeding much more than they say. We will see sustained rates hardening, and there will be pressure on retail commissions. There will also be job losses in the large companies throughout next year.
Paul M: All the indicators are there for a sustained increase in commercial pricing. Commercial motor is gaining momentum, and that is always the lead indicator.
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