Commercial insurance rate predictions for 2017, by Matt Keeping
New York, NY (Oct. 28, 2016) – Everyone is looking for growth; our carrier partners are no exception. Management, investors and analysts are all looking for growth. That doesn’t make it easy to come by. The headwinds insurers have faced for several years now show no signs of abating. Rates are soft, interest rates low. Balanced against relatively benign nat cat events and a steady influx of alternative capital, these factors are nonetheless manageable. Year-to-date, two-year and five-year returns are quite good, albeit not always where the analysts predict or prefer they should be.
Stock prices of course reflect more than modest numbers. They also reflect the opinions and expectations of the analysts. It occurred to me recently in reading analysts’ discussions of our sector that for many of our analysts the current conditions are all they’ve ever known directly. They see an industry given to good and sometimes fair short-term performance with difficult future prospects given GDP growth trends and competitive conditions. The analysts haven’t seen the hard and soft cycles that for years ruled the industry, creating an environment of potential volatility and keeping investors and analysts on their toes.
It may not matter. Those days may never return. The fundamentals of the industry, the forces that guide the flow of capital, may have changed sufficiently that things may really be different now. I still can’t help thinking, however, that a broader perspective might be useful.
Before taking a broader look, let’s look at 2016 and address the possibility that some of the prevailing conditions may actually be at last shifting. Claims are up this year, with nat cat losses accumulating. We saw (as of this writing) hurricanes hit Florida for the first time in 11 years and are still calculating the impact of Hurricane Matthew. I would argue, however, that tragic and awful as the storm damage may be, here is a case of the exception proving the rule. All indications are that the industry’s ample policyholder surplus and the steady supply of alternative capital will allow insurers to easily handle this upturn in outflow. Combined ratios of insurers seem solid and few observers are expecting any broad market hardening at all.
A similarly benign and yet complicated picture emerges as we look closer at industry activity and pricing this year. Some property rates have bottomed out and yet others still have room to fall further. Increases are occurring in a few lines (see the following pages), led by cyber, though those increases are in some cases less steep. The net for many is fairly flat.
Some carriers are growing, some by buying other related businesses. Some are shrinking, by shedding lines. But mostly large insurers are attacking the slow-growth quagmire through structural and strategic methods of expense management. Talent is being shed, but it’s not lost, as the few new, smaller carriers entering the scene will hire that talent — another case where the big-picture net result is flat. Many see growth by merger as the inevitable strategic solution that insurers will pursue. For now, we’re not seeing it.
So what are we seeing? We could call it a rather uninspiring period of flat growth and uncertainty. I prefer to call it a sign of stability. I’d also point out that in a heavily regulated industry like ours this is not a bad thing. This is a good thing. This stability, in fact, reflects the main social and economic purpose of our industry: that when disaster strikes, we can be relied upon.
We could also put it this way. The reward for investing in insurance carriers is lower than most would like. At the same time, the risk is lower, too. And again, that’s exactly the way it’s supposed to work. In the broader view, the picture I believe is a positive one. It certainly is for the insurance buyer, our clients. But I believe that it’s ultimately positive for both carriers and brokers as well. Here’s why.
Looking ahead I see possibilities that point not just to continued stability but to significant opportunities. The chief opportunity we see is in the understanding that one of the most powerful paths to growth and performance is by understanding and leveraging the intersection of people and risk. In most organizations today, these are two siloed worlds. “Risk” is about insurance, “people” is about talent acquisition, HR and benefits. The data we see reveals this to be a false dichotomy.
We are finally attacking a prime example. Workers’ compensation and health benefits are still under different budgets and often in entirely different departments. But how different are they? Aren’t they both part of the same effort: to support a healthy and productive workforce? It would of course be a big change to bring those two together. But big change is what makes for growth and advancement. With conviction, vision and the data to back it up, we can make that happen.
Another avenue for growth is narrowing the gap between economic and insured losses by widening the availability of risk transfer. For example, new technologies (see our recent postings on blockchain) hold out the promise of automating some of the process in distributing micro-insurance and spot insurance products. To some, these kinds of developments stand in blatant contrast to the underwriting partnership that remains the basis of our industry. I would argue that we need to embrace such developments, to position ourselves to guide them and, ultimately, to own them. Rather than a threat, they may be a golden opportunity.
That is the kind of view I hope the analysts will consider. Yes, fast growth may not materialize in this quarter or the next. But in the long run, the future is rich in promise and I would encourage the analysts to grow their perspective.
Click here to view the full Marketplace Realities report for all of our commercial insurance rate predictions for 2017.
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