All eyes on Washington
(From the publication’s introduction by Joseph C. Peiser, Senior Editor and Head of Broking for North America)
It’s like the two-minute warning in football, overtime in basketball, extra innings in baseball or, if you’re not a sports fan, anything that keeps you glued to the action. It’s the level of activity in Washington, D.C., where a new administration looks to deliver on the promises that brought it to power. The only certainty seems to be uncertainty — that we stand at the threshold of potential change.
Trade, taxes, infrastructure, regulation: change could be coming in all of these areas, and all have the potential to affect our clients, our carrier partners and, therefore, the advice we offer. In terms of the marketplace mechanics and price predictions that are the focus of this publication, change is one thing we haven’t seen in a while. Will the transformation at hand turn this long, soft market? To help answer that question, let’s take a quick look back.
Fluidity and stasis
Anyone who remembers the 1970s will recall a time when the rules of macroeconomics seemed to stray from the norms. Slow growth and inflation were not supposed to go hand in hand, but they did in the form of stagflation. Fast forward to this decade, when the macroeconomic rules we expect to steer the commercial insurance marketplace have likewise strayed from the norms.
When interest rates are low and insurer investment incomes suffer, premiums have traditionally risen to compensate. Historically low interest rates, however, have not budged the current soft market. The cause? The fluidity of global capital. In search of ROI, investors have turned toward insurance, flooding the marketplace with capacity and keeping prices down. Even as insurer losses have edged up — another traditional source of upward pressure on prices — the marketplace has remained stable and buyers in most lines of insurance have benefited. There are exceptions, notably cyber, auto and some of the specialty lines as reported below.
This stasis we are in as an industry has proven quite resilient, even in the face of some shocks to the marketplace. One of the more notable shocks is an ongoing wave of consolidation that has reduced the number of markets: Chubb and Ace; XL and Catlin, and next we are looking at Liberty and Ironshore, as well as Sompo and Endurance. The marketplace seems to be easily absorbing these changes. Uncertainty at major insurers, which has pushed some carriers to retreat from certain lines of business in certain geographies, has again caused ripples rather than waves.
In these pages, we’ve noted several times that the resilience of the marketplace through all this bustle is an apt expression of what we’re all about: a haven in a storm, a solid source of protection, the foundation for growth.
So will the stasis be over? If the proposed changes do happen, we see two potential scenarios where the movement of capital would indeed end the status quo.
If the moves designed to fire up economic growth succeed, we could see interest rates climb as the federal monetary stewards tap the brakes. Stocks could rise as well as the growing economy attracts investors. These forces could move capital away from the insurance industry, removing the leading factor in the present soft market. Meanwhile, a hotter economy would increase the demand for insurance, also putting upward pressure on premium rates.
If, on the other hand, the nationalist voices hold sway, the global trade economy could contract. Transnational investment might also decline, reducing the fluidity of capital that has brought the sustained flow of capacity into the risk transfer business.
It’s also possible that aspects of both scenarios come true, and instead of neutralizing each other they could amplify the pressures that would harden the insurance marketplace.
As for further consolidation in the industry, it’s highly possible that the prospect of broad tax reform under the new administration will put plans on hold in 2017, as tax changes can affect the valuation of companies. Dealmakers are likely to take a wait-and-see approach.
We have seen predictions of a market turn from industry observers off and on during this period of stasis, often arguing, for example, that one mega-loss event could do it. Those arguments, however, lean on old school rules about what makes the marketplace tick. Our predictions may be more in line with the forces at work today.
Like all predictions they are based on a series of ifs, the central one built around the anticipation of change. Just because we are expecting it, however, doesn’t mean it’s going to happen.
It’s too soon to tell, of course. For now, we watch and wait.
Key price predictions for 2017
|Non-cat risks:||–5% to –10%|
|Cat-exposed risks:||–5 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%; +15% in Florida|
|Auto:||+3% to +10%|
|International:||–10% to flat; –5% to flat for Defense Base Act coverage|
|Directors and officers:||–12% to flat|
|Errors and omissions:||Flat to +5%; +15% to +20% for poor loss experience or loss-prone industries|
|Employment practices liability:||Flat to +5%; +5% to +15% in California|
|Fiduciary:||–5% to +5%|
|+5% to +10%; +15% to +20% for POS retailers and large health care; competitive for first-time buyers|
+4.5% to +5.5%
|Insured plans:||+7.2% to +8.2%|
–2% to flat
|Active hot spots:||Capacity limited|
–10% to –5%
|Tier 1:||–5% to flat|
|Most buyers||Flat to +5%|