At the first half of 2023 results – and while going through a hard market – pricing outlooks remain positive, which should support underwriting margins for London Market insurers, according to Goldman Sachs.
At the same time, continued underwriting discipline from reinsurers – as they continue to feel the impact of natural catastrophe activity – will likely maintain price momentum.
“The longevity of the current hard market cycle remains a key investment focus as a determinant of underwriting margin sustainability for London Market insurers in our coverage,” Goldman Sachs stated.
Adding: “Pricing outlooks, notably on property, were positive at the 1H23 results according to comments from the LM insurers in our coverage. In our view, 1) reinsurance costs, 2) capital supply and 3) Nat-Cat activity are key indicators for judging price momentum at primary insurers going forward.”
Pricing in commercial P&C lines increased c.3.7% in Q3 vs c.5% in the second quarter, according to MarketScout. Similar to Q2, the pricing increase was the highest in Commercial Property (+9%) in Q3 (vs +10.7% in Q2).
This is in line with the premium renewal rate index published by Ivans, which noted an increase in the average premium renewal rate across major commercial lines QoQ, with Commercial Property seeing the highest rate increase vs other lines, analysts explained.
The Council of Insurance Agents & Brokers has also commented that property prices are likely to rise further owing to little new capacity entering the market and sustained higher catastrophe losses.
Elsewhere, price increases in D&O remain materially lower than in Commercial Property. Beazley and Hiscox indicated a cautious stance on growth in D&O at their 1H23 results, which should support underwriting margin.
At the same time, reinsurers are focusing on continuing underwriting discipline. Following years of weak performance and above-average natural catastrophe activity, Swiss Re analysts pointed out, the reinsurance market is reverting to a more sustainable level of risk-adjusted pricing.
This trend is likely to continue at the January 2024 renewals, Goldman Sachs highlighted, given the focus on risk-adjusted returns.
“S&P highlighted post the Monte Carlo Rendez-Vous (link here) that underwriting discipline in reinsurers is likely structural against a backdrop of higher frequency weather events in recent years. This includes discipline on T&Cs, including terms on lower layers to reduce loss exposure,” analysts added.
Stating: “In our view, this implies that outward reinsurance costs will likely remain high for primary insurers. Against a backdrop of higher inflation and higher frequency of weather events, this will likely push primary insurers (as purchasers of reinsurance) to maintain underwriting discipline with continued price momentum. The likelihood of this appears even higher in the event that primary insurers retain more risks as reinsurers de-risk through lower layers.”
On top of this, sustained weather events and higher inflation are likely to prolong the hard market cycle, analysts warned. According to Gallagher Re’s data, US severe convective storm insured losses exceeded $50 billion for the first time, on its record, in 2023.
This reflects a trend of higher frequency of secondary perils, Goldman Sachs noted. Other key trends in the sector include higher Nat-Cat activity seen in recent years, higher economic inflation, and higher retention among primary insurers driven by higher reinsurance costs and reinsurers de-risking from lower layers.
Goldman Sachs US team, in its 3Q23 preview, highlighted an estimated amount of c.$27 billion insured losses, with the US generating c.$17 billion of these losses, which is modestly below the 10-year 3Q average.
“In our view,” analysts stated, “whilst this supports underwriting margin for Beazley, Hiscox and Lancashire in Q3, the trend of more frequent weather losses remains a key consideration in underwriting decisions. Overall, we believe this risk-averse sentiment should help to prolong the hard market cycle and preserve underwriting stability in primary insurers.”
They added: “We would highlight that Fitch noted a positive outlook on growth and underwriting profitability in the US Excess & Surplus market, as risk appetite becomes out of scope for admitted market carriers.
“Specifically, Property COR in E&S outperformed the P&C industry’s COR in 2022, and the hard pricing in most product segments is keeping pace with loss costs, supporting the underwriting margin outlook. In our view, this should help drive growth for LM insurers, as Lloyd’s of London has a material share in the US E&S market.”
