Canadian Underwriter

Death of the Pricing Cycle?

July 1, 2016   by Sean van Zyl, Freelance Writer

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The current excess capital glut within the global property and casualty insurance industry, mainly concentrated in the reinsurance sector, has combined with almost negative investment income growth due to low interest rates to drive the present “soft market” across commercial and personal lines. Many industry experts expect this will continue unabated for the foreseeable future.

This high tide of unemployed capital has introduced a new pricing dynamic that, short of a mega-catastrophic event resulting in a multi-billion-dollar insured loss, signals the traditional underwriting pricing cycle is something of the past.

David Mew, national placement leader for Marsh Canada, describes the current market conditions as being the longest soft market in 35 years. “For the foreseeable future, I don’t see this changing, primarily due to the excess capital situation,” Mew says.

With low interest rates, excess capital and lack of any major Cat losses over the last three years, reinsurers and insurers are going to focus on underwriting and chasing business volume to satisfy shareholders, he suggests. “The global economy has changed so much, and become so inter-connected, that local developments have less impact on pricing. I think the pricing cycle as we know it is broken.”

Sean Murphy, president of Lloyd’s Canada Inc., describes the current market environment as the “perfect financial storm,” with exceptionally low interest rates and excess capital combining to drive down premiums and, in some cases, insurers have widened their coverage.

Many in the market have rarely seen tougher conditions. “It’s certainly the case that the present conditions may constitute something of a new normal,” Murphy comments. “Canada is facing similar pressures as the ones we are seeing globally,” he notes.


Robert Hartwig, president and an economist at the Insurance Information Institute, notes that to some extent, the industry’s traditional pricing cycle is dead, but this perspective depends on the definition of the “pricing cycle.”

Post-WWII to the mid-1970s was a period of stable underwriting and pricing, not the “boom and bust” – hard and soft – activity of subsequent years, as influenced by cash flow underwriting, Hartwig explains. “This fundamentally shifted how insurers conducted business, relying on investment income.”

Globally, the p&c insurance industry’s total annual underwriting capacity is about US$1.8 trillion to US$2 trillion compared with the United States market’s total capacity of roughly US$675 billion.

Using the U.S. market’s surplus and estimated 20% excess level of capital and then applying this to the global numbers suggest a very large amount of excess capital accumulation. Barring an unforeseen mega-Cat, Hartwig does not expect coverage terms and pricing will change in the near future.

Steve Webersen, head of insurance research at Conning, Inc., says that almost all commercial lines in the U.S. marketplace have shown no rate growth for at least the last nine months. “However, I don’t think we can say that there will never be another hard or soft market again,” Webersen comments.

The excess capital factor is concentrated in the global reinsurance sector, which has softened treaty renewal rates. Reinsurers are also dealing with higher retentions from primary companies and battling non-traditional funding, such as the Cat bond market, prompting them to start partnering with capital providers to provide non-traditional coverage vehicles, Webersen notes.

“Reinsurers have also encroached into the primary market. At this stage, there are very few reinsurers that operate solely in the reinsurance sector,” he says.

Greg Williams, assistant vice president for U.S. and Canadian markets at A.M. Best, concurs the reinsurance sector has mostly been negatively impacted by the global capital excess, which has fed into the primary insurance market.

In its year-end Best’s Special Report, the rating company notes that “conditions will remain competitive and challenging, as primary companies are expected to continue retaining more business and/or seek better terms and conditions for sharing their profitable business.”

Overall, Williams expects downward pricing pressure to continue mostly in commercial lines for both Canada and the U.S. markets, adding that Canada has seen a moderate reduction in rates.

The full extent of the insured loss arising from the Fort McMurray fire devastation is currently unknown, but industry commentators anticipate the event will not materially impact the pricing of commercial lines because of the existing heightened competition.

It has been estimated the Fort McMurray fire could produce an insured loss of between $4.4 billion and $9 billion. Even at the lowest loss estimate, the event clocks in at more than double the insured cost of the 1998 ice storm ($1.9 billion) and 2013’s floods in southern Alberta ($1.8 billion).

Joel Baker, president and chief executive officer of MSA Research Inc., agrees the wildfire loss will not be sufficient to turn the commercial market in Canada.

“The fire will almost definitely cause localized hardening of primary property market in Canada, as well as within the reinsurance sector,” Baker reports.

Preliminary data collected by MSA Research for the first quarter of 2016 suggests the Canadian p&c insurance industry is still delivering favourable financial returns despite the decline in coverage pricing. Insurers and reinsurers saw underwriting income rise by almost $900 million, while net claims costs fell year-on-year by 14.2%. Though net income dropped 24%, this was largely the result of a massive 48% downward slide in investment income.

Nadja Dreff, director of economics and assistant chief economist at Insurance Bureau of Canada, highlights the negative impact of lower interest rates and bond yields on the industry’s investment returns. The average yield for one- to three-year Government of Canada bonds was a mere 0.5% at the end of 2015.

Says Dreff, “Globally, low interest rates have contributed to the capital accumulation evident in the reinsurance market.”


Intensified competition in Canada’s p&c insurance marketplace has led to a more prolonged “soft market” than past industry cycles, observes Martin Thompson, senior vice president of commercial insurance at RSA Canada.

Although Thompson does not see anything on a global scale that is going to change market conditions, he notes that the downward pressure on pricing in Canada has been more “targeted,” affecting certain lines and products compared with other international markets.

He further suggests current market conditions are producing a gap in terms of profitability between larger “top performers” – which have embraced new technologies to reduce claim costs and operating expenses – and companies operating on the lower end of the scale.

Colin Simpson, chief financial officer of Aviva Canada, adopts a more positive view of the pricing cycle, which will likely firm just as quickly as rates decline. “There’s always going to be losses, and, eventually, the excess capital will dry up,” Simpson says.

However, he expects any future turn in the pricing cycle will likely be less like the dramatic pendulum swings of past cyclical shifts. One benefit of the current heightened competition, Simpson suggests, is that insurers must look at becoming more cost-effective in their approach to writing business.

Another significant trend having emerged from the industry’s capital glut is consolidation through mergers and acquisitions (M&A), Murphy says. “The market has seen a considerable amount of M&A activity throughout 2015, and that has continued into 2016. There is no doubt that the combination of the soft cycle and excess capital in the market has meant that M&A activity is still being looked at. Capital is not restrained by borders, and it will be deployed in areas where returns are favourable and the market predictable,” he explains.

Thomas Holzheu, chief economist, the Americas for Swiss Re, is sceptical that the current excess capital will result in the end of pricing cycles. Economic factors such as low inflation and low interest rates will, eventually, turn and, thus, reduce excess capital and put pressure on profitability, Holzheu says.

That said, he notes there is no question the industry’s current excess capital has brought about a global soft market. A big factor influencing these conditions, he suggests, is no major Cat losses over the last three years. In this respect, this “windfall” cannot be counted on going forward as Cat costs are likely to mount to more average levels, eroding the industry’s capital position, Holzheu explains.


Darius Delon, chair of RIMS Canada Council and associate vice president of risk services at Mount Royal University, points out that when insurers drop into single-digit returns on equity for two years running, there is an inevitable tightening of rates across the industry.

As such, Delon does not believe that the historical pricing cycle has become a relic of days past.

However, he does concede that insurers are showing a greater willingness to work with risk managers in applying risk control/mitigation measures into coverage terms and pricing.

This is definitely a “buyers’ market,” says Gloria Brosius, a board director for RIMS, the risk management society, and risk manager for Colorado-based Pinnacle Agriculture Holdings.

The combination of low investment returns combined with excess capital in the insurance industry has had a marked impact on commercial pricing and coverage terms, Brosius notes. Multi-year policies are often available during soft market cycles, she says.

All that said, Brosius is leery of what the future may hold in terms of price tightening of commercial rates. “With 26 years of experience, I have no doubt that the pricing cycle will continue to exist.”

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