Marketplace Realities: Edge of a Cliff?

Marketplace-Realities_Oct2014

It’s long been common wisdom in the insurance business that whatever we say about rates should come with an asterisk. The asterisk refers to a note that says something along the lines of, “Of course, in the event of a mega disaster, everything could be different. The market could turn overnight.”

A softening market would suddenly turn hard and a hardening market would get harder. Those are the basics of the hard and soft market dynamics that have more or less ruled our world for the past several decades.

But the insurance marketplace is evolving and the changing dynamics currently underway may spell the end of traditional market cycles. For example, we see the possibility that in the face of a mega disaster today, a softening market could actually turn softer, or at least maintain its downward turn. And in the absence of a major loss, this softening could accelerate. We could be at the edge of a cliff, possibly standing with one foot over the edge.

Here’s why we think so…

  • In the current long-term, low interest investment environment, sources of capital continue to hunt for
    opportunities. The reinsurance marketplace is bursting. Alternative capital is now pressing on the primary side.
    Add that to a year of relatively low insurable losses and a hurricane season that is following predictions of light
    activity, and we have a plentiful supply of capital exerting a steady downward pressure on the marketplace.
  • $100 billion isn’t what it used to be in today’s massive global insurance environment. In a recent report, a major insurer wondered if a $100 billion loss would really shock the marketplace. No one doubts that the impact would be felt, and certainly we would expect that a loss of that magnitude would carry a human toll that would affect all of us in the insurance world and beyond. But in terms of changing the supply and demand curves of insurance, maybe not so much.
  • The new capacity seems so eager and steady that even in the face of a mega disaster, we do not see a withdrawal of that capacity. On the contrary. Anticipating a rise in rates, which usually follows a huge loss, more capacity might come in. That could well counter the withdrawal of capacity by insurers paying out the mega claims for the mega loss, and rates would continue to decline. With more modest losses – as we’ve been seeing the past two years – we could be headed over the edge.
  • Insurance carriers are likely to be able to withstand these conditions. They are becoming more efficient and more stable as a result of improved balance sheets and the access to additional forms of capital.

For insurance buyers and risk professionals, now is the time to think about the strategic possibilities as renewals approach. Work with your insurance broker to optimize your risk management investment and protect your business. We are sure that insurance carriers will welcome the opportunity to be creative to win new and retain existing clients as they look to maintain and grow market share and thrive in a marketplace undergoing, potentially,
fundamental change.

About Matt Keeping

Matt Keeping is Chief Broking Officer for Willis North America. In this role he leads a team of placement officers …
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