Willis Tower’s Watson’s Marketplace Realities series includes line-by-line predictions for North American insurance buyers in 2016 and beyond.
New Pieces in a Changing Puzzle
At the macro level, the satellite view, much remains the same for insurance buyers: capacity remains plentiful, low interest rates invite alternative sources of capital to explore the insurance industry (which further increases overall capacity), and so far, 2016 appears to be another relatively light year for catastrophic loss. The result: for most buyers, soft market conditions prevail.
Look a bit deeper and a more complicated picture emerges, one in which several of the key pieces in the risk management puzzle are changing. One super-carrier, AIG, is poised to get smaller; and perhaps in the coming years, the still-giant company may divide, as some have been urging, into several pieces. Meanwhile, another super-carrier is arriving on the scene following the Ace/Chubb merger. Those two changes alone can add a healthy dose of complexity to a company’s renewal strategy.
A line-by-line look at the industry reveals further complexity. While a slight majority of lines are still seeing decreases, the level of those decreases is smaller. In property insurance, for example, rates are expected to fall for most buyers, but some will find decreases in the single digit, where last year they might have enjoyed double-digit reductions. In the case of auto coverage for businesses, decreases have given way to small increases for the typical buyer. The same is true for trade credit insurance. Meanwhile the increases that have held sway for companies renewing cyber and errors and omissions (E&O) policies are getting steeper.
On the benefits side, we see a combination of forces that reflect the situation in the P&C world — either directly or in reverse. Mergers of huge players have changed the landscape here, too. And while marketplace conditions we have seen for several years — steadily rising prices — remain, buyers recently received a reprieve in the delay of the high-end excise tax, the Cadillac Tax.
The Question of How Carriers are Chosen in the First Place
The changes in the marketplace — the changing puzzle pieces — will force some insurance buyers to consider moves they might otherwise have been content to ignore (for the simple fact that a risk manager cannot choose to stay with a carrier if that carrier no longer exists). That in turn will raise the question of how carrier partners are chosen in the first place.
In most cases (and certainly for leading firms with billions in revenue), the selection process involves many considerations. Price, no doubt. But also key is the financial stability of the company that will have to pay the claims should a loss occur and so are the culture and personality of the people and institution involved in the transaction. In other words, the choice of a carrier involves the variables, tangible and otherwise, that inform this important strategic relationship. Many pieces must fit to solve that puzzle.
Proof of the importance and complexity of this process came from an unusual place recently — the same place that not long ago emerged as a potentially disruptive force in the insurance industry: Google. The company announced a retreat from its insurance comparison-shopping service, and some observers were quick to point out that insurance is a little complicated yet, even for the cyber might of the internet giant. Others maintain that the purchase of personal insurance without the mediation of agents will come in time. But when Google announced its entry into the insurance intermediary business some on the commercial insurance side began to wonder if the agency/broker model altogether might one day go the way of pay phone; now that possibility seems more remote.
Risk Management Will Never be a Self-Driving Industry
Change, of course, remains the only constant. Self-driving cars, another technology Google has championed, may be advancing quickly enough that we might see driverless vehicles on our highways within a few years (an innovation that raises several risk management questions, though we’ll leave those questions for another time). Risk and human capital management, however, will never be a self-driving industry. People, in strategic relationships and partnerships, offer too much value in a world that seems to only grow more complex.
We have one more marketplace change to mention: at our own organization. This issue of Marketplace Realities is the first published by Willis Towers Watson, an organization that brings together a comprehensive set of resources and expertise that has never been brought together in quite this way, with an eye toward the unity of all aspects of a company’s assets — financial, physical, virtual and human — to unlock maximum potential. In keeping with tradition, however, our spring update maintains the title of the fall release, “Bringing the Pieces Together.”
In the spirit of bringing pieces together we are pleased to be able to refer here for the first time to the Commercial Lines Insurance Pricing Survey (CLIPS), which compares prices charged on policies underwritten during the fourth quarter of 2015 to those charged for the same coverage during the same quarter in 2014. Taken together, commercial insurance prices were nearly flat during the fourth quarter of 2015, rising by about 1% from their levels the year before. The graph on this page, from CLIPS data, shows the marketplace in perspective, as we clearly see the softening trend that reversed the rises that peaked between 2012 and 2013.
As we fit the pieces of our new company together, we look forward to being able to provide (and for many we have already) better and more comprehensive answers to the questions our clients have as they strive to solve their risk management puzzles and reach their highest goals.
Key Price Predictions for 2016
|Non-CAT Risks:||-7.5% to -10%|
|CAT-Exposed Risks:||-10% to -12.5%|
|General Liability:||-5% to flat, +5% to +10% for risks with losses|
|Umbrella/Excess:||-10% to flat; +10% for truckers and NYC construction|
|Workers’ Comp:||-2.5% to +2.5%|
|Auto:||Flat to +10%|
|Directors & Officers:||-5% to +5%|
|Errors & Omissions:||Flat to +10%; +20% to +25% for poor loss experience or loss-prone industries|
|Employment Practices Liability:||Flat to +3%; +5% to +15% in California|
|Fiduciary:||-5% to +5%|
|+5% to +15%; +10% to +30% for POS retailers and large health care; competitive for first-time buyers|
-10% to flat
|General Aviation:||-20% to flat|
+4% to +5%
|Insured plans:||+7.5% to +8.5%|
|Most buyers||Flat to +5%|
|With South American or East European risks||+5% to +10%|