On the increase

Even the Oracle at Delphi – the greatest seer in the ancient world – might have thrown up her hands in exasperation at being asked to predict a positive outlook for commercial rates this year. And, adding insult to injury, Ernst & Young pointed to a further 5% drop in insurer profitability this year, making a cumulative 12% fall in the last two years. How low can it go before commercial insurers act on rating?

Certainly there were some signs of stress among an increasing number of commercial players at the 2012 half year. And then, even the usually unflappable Andrew Torrance, the long serving Allianz UK CEO, called the provider’s commercial combined operating ratio (COR) performance “unacceptably poor” in its third quarter results.

There is still capital in the commercial space, but the big question before this year’s annual reporting round is whether profitability has reduced enough to erode the remaining capital and force rates back up.

Sure, there are pockets that will experience rating pressure (such as commercial property), but not many. Moreover, long-awaited government liability reforms won’t impact claims inflation for some time yet, and at a macro level, small business performance is static, thanks to depressed GDP growth and lack of confidence. It’s very hard for brokers to persuade their clients to accept rate increases.

Composite insurers have, for the most part, shown gains from improved motor performance, which has helped to offset deteriorating commercial results, but that won’t be the case going into 2013. Though motor rates are still higher than they were three years ago, they have flattened out. Scale players like Direct Line Group have lost volume to improve underwriting performance, but motor is not going to ride to the rescue for most providers any time soon.

There is also a residual worry about smaller commercial insurers subsuming their losses into the rest of the portfolio, enabling them to withstand poor performance for longer than the bigger commercial players.

What is the impact on brokers? I think the local broker, directly linked to their customers, will become even better placed to maintain their positions and even get rate increases via skilled relationship management. A bigger, more centralised strategy inevitably impacts the front-end relationship. Local is the new black.

As we approach the year-end reporting season, insurers’ commercial performance should be studied even more intently than usual. Will significant erosion in commercial reserves, coupled with rapid claims inflation, push CORs over 100% from the 96-99% level at the half year? If CORs have worsened and start to nudge 105%, I believe that will be the trigger for significant commercial rating increases. If not, we’ll need to wait for another year.

Peter Hubbard, chief executive, UK General Insurance