Analysis by KBW shows the second quarter 2020 reinsurance renewals, most prominently the Florida-focused June 1 and broader, southeastern US-focused July 1, included significant property catastrophe reinsurance rate increases.
Analysts think these increases reflect a number of related factors, including the fact reinsurance capital providers (both traditional reinsurers and insurance linked securities investors) now insist on higher overall rates in response to the last three years’ cumulative hurricane, typhoon, and wildfire losses.
Sustained loss creep on several hurricanes and typhoons (that is, events that have already happened) have also demonstrated some catastrophe models’ previously underestimated parameter risk.
In addition, KBW notes how potentially large COVID-related business interruption losses have trapped ILS capital, driving significant dislocation and accompanying capacity shortfalls and rate increases, particularly in the ILS-heavy retrocessional market.
Analysts expect the latter issue to resolve itself over time, as capital providers step up allocations in response to higher rates, but also see the former issue as promoting a sustainably higher equilibrium pricing point for catastrophe reinsurance pricing.
Overall, analysts believe most commercial lines’ increases accelerated in 2Q20 – especially for specialty lines – reflecting already weakened underwriting margins, worsening loss trends, lower interest rates, and elevated risk sensitivities.
Personal auto insurers’ 2Q20 underwriting results should include dramatically lower claim frequencies year on year as social distancing and self-quarantining reduced overall driving, with the biggest y/y decline likely in April.
Although some states’ infection rates are currently rising quickly, which could spur another round of stay-at-home orders and decreased driving, analysts expect other regions’ economic reopening and overall “COVID fatigue” to translate into diminishing y/y driving decreases in 2H20.
Recent months’ personal auto renewal rate changes (which analysts calculate as the sum of the trailing 12-months’ rate-driven premium increases dividend by prior-year written premiums) were broadly stable throughout 2Q20, but analysts expect State Farm’s well-publicised plans for increasing competitiveness to stimulate more rate decreases beginning in July 2020.
Homeowners’ renewal rate changes (which typically earn in more slowly than auto rate changes, since most homeowners’ policies have 12-month terms) seem to be have stabilised at increases that are slightly below 2%, and to date, analysts haven’t seen indications of intensifying 2H20 Homeowners competition.
KBW expects very materially disrupted auto claim trends in 2Q20, with large frequency declines outpacing modestly elevated severity trends, with a reversion toward normalised levels as the economy (slowly, and probably unsteadily) recovers.
For commercial lines pricing, MarketScout’s quarterly commercial insurance rate barometer showed an overall 4.8% y/y P&C rate increase in 2Q20, broadly consistent with recent quarters’ increases.
For most commercial lines (Workers Compensation remains the key exception), KBW expects persistent or accelerating rate increases in 2H20 and (at least into) 2021.
Most lines rate changes accelerated sequentially with—as is almost always true—some volatility by product line. Analysts think accelerating increases are clearer when comparing rate changes on a y/y basis.
KBW expects accelerating commercial lines pricing momentum to stabilise—and in some cases expand—some commercial insurers’ accident year underwriting margins, partly (and irregularly) offset by some reserve charges for recent years’ casualty reserves in response to worsening liability loss trends.
KBW views reported reserve development as a lagging indicator of pricing, implying that some reserves holes will emerge over the medium- to long-term.
Beyond a few still-soft individual lines (most notably Workers’ Compensation), KBW analysts expect most commercial lines’ rate increases to accelerate through 2H20 and at least into 2021, as more insurers recognise the inadequacy embedded in prior years’ rate levels, grapple with persistently low interest rates, and contemplate the impact of COVID-19 on risk appetite.
