To transfer a risk is to solve a puzzle. Some of the pieces in that puzzle will belong to the company that is transferring the risk – those would include retentions, captives and other self-insurance options. But most of the pieces in the risk management puzzle come from the carrier community. This year, marketplace forces changed the size and shape of those pieces to an extent we have not seen for some time. That will impact the way we bring the pieces together to solve our risk management puzzles.
The key force driving this change in the market is consolidation. In commercial insurance (ACE/Chubb) and in health insurance (Anthem/Cigna and Aetna/Humana), some of the pieces are on the verge of getting a lot bigger, should the transactions come to fruition, giving rise to a new breed of “super carrier” as some have proclaimed. Another factor is insurers in Japan/China buying Lloyd’s syndicates or other British insurers, which is expected to continue into 2016.
Why is this wave of consolidation happening? Companies seek growth and inorganic growth – buying other companies – is a long-standing way to achieve it. Obviously, the cost synergies that come with mergers and acquisitions can boost company value.So why now? An ongoing environment of low interest rates continues to challenge insurers’ investment income streams. An extended period of relatively low levels of catastrophic loss puts downward pressure on premium rates, another challenge to insurer revenues. With organic growth hard to come by, inorganic growth becomes all the more appealing.
There’s another motive for consolidation: as a strategic effort to adapt to a changing environment. That would be the case in the health benefits arena, where health care reform is changing the rules of the game and carriers are bracing for an uncertain future.
On the brokerage side, these same forces are at work. We at Willis, of course, are thrilled with the prospects for expanding our service and value to clients with the combinations we have announced.
In the short run, consolidation shrinks the market. As two companies become one, the marketplace offers one less piece with which to solve the puzzle of an insurance program. Our carrier trading partners would like us to believe 1+1 = 2 but historically this has not borne out on either side of the equation. But a smaller market with fewer, larger players also opens up the field to new comers that can focus on smaller, specialized niches in areas of potential growth. So consolidation often yields its opposite by thinning the competition and encouraging the emergence of new puzzle pieces.
What does this mean for the risk professional? It means the marketplace continues to evolve, which means that new options will need to be understood and investigated and old options given a fresh look. It could also mean that we should challenge insurance carriers to be bolder about the risks they take on.
As a risk adviser, it’s our role to help in the process, to help our clients bring together the pieces of their risk transfer puzzles. That’s a service needed more than ever in the current environment.
Key Price Predictions for 2016:
|Non-CAT Risks:||-10% to -12.5%|
|CAT-Exposed Risks:||-12.5% to -15%|
|General Liability:||-5% to flat|
|Umbrella/Excess:||-10% to flat|
|Workers’ Comp:||-2.5% to +2.5%; up to +10% in CA|
|Auto:||-10% to +5%|
|Directors & Officers:||-5% to +5%|
|Errors & Omissions:||Flat to +5% or more for programs with good loss experience; +5 to +25% for programs with poor loss experience|
|Employment Practices Liability:||-3% to +3%|
|Fiduciary:||-5% to +5%|
|Flat to +15%; +10 to 150% for POS retailers; more competitive for first-time buyers|
|Airlines:||-15% to -20%|
|General Aviation:||-20% to flat|
|Self-Insured plans:||+4% to +5%|
|Insured plans:||+7.5% to +8.5%|