Insurer CFOs report hardening P&C markets, survey says

Chief financial officers with North American property and casualty insurers believe both those markets are hardening, according to a new survey by professional services firm Towers Watson.

 Of the 23 CFOs who participated in the survey, 75% characterized the property market as hardening, hard or at the top of the cycle, the firm said. That’s close to a 30 percentage-point increase over results from the survey two years ago.

In addition, 65% of those surveyed said they see the casualty market as hardening, hard or at the top of the cycle, a 52 percentage-point increase over the previous survey.

Only 15% of those surveyed said the property market is softening, and 10% indicated the casualty market is softening, Towers Watson noted.

Those CFOs cited pricing, profitability and rate levels as principal drivers of the hardening property market, while those who see a soft property market listed capital-related drivers, such as current capital base, and capital entering and exiting the industry.

Of those who said they consider both markets  to be hardening, 51% and 52% said they believe the property and casualty markets respectively to remain that way for the next one to two years, according to the survey results.

“Insurers’ perceptions of the market have changed considerably, from a glimmer of hope for a turn in the insurance cycle, to the solidifying of firmer rates we’re experiencing today,” Bruce Fell, a managing director in Towers Watson’s Risk Consulting and Software business noted in a statement on the survey results.

“The impact of the softer market the past several years, combined with low interest rates, has hurt insurers’ profitability,” he added. “The state of today’s market should give insurers some breathing room and an opportunity to increase their bottom-line.”

The vast majority of those surveyed (98%) said they believe reserve redundancies still exist. While 81% said they expect these redundancies to continue for at least a year, 42% said those redundancies will continue for one to two years, and 25% said they expect them to last two to three years, according to the results.

“We believe the current hard market is very different from the hard markets of the past,” Fell noted.

“Rather than being a reaction to poor pricing and severely deficient reserves – which cut deep into the industry’s financials and take years to reverse – the current market is characterized by pricing reflective of low investment yields and a tendency towards rational use of capital, and exists in spite of the reserve redundancies suggested by the results of our survey,” he said,

“Better investment yields coupled with the perception of relatively healthy financials may eventually lead to eroding pricing discipline. Further, the recent influx of alternative capital into the catastrophe reinsurance market could place downward pressure on reinsurance rates.”

In terms of key challenges, 81% of survey respondents cited interest rates as their top economic and market environment concern, followed by natural catastrophes and inadequate rate levels at 44% and 34% respectively.

Nearly half (46%) said they are responding to challenges by realigning their investment portfolio, while 37% cited expanding into new products or markets as ways they’re taking on market and economic challenges.

Most participants (93%) said investment returns are the leading external challenge to achieving growth, profit and risk objectives, with economic growth (51%) and competitive environment (49%) following, according to Towers Watson. Nearly half (45%) said they’re not well prepared to respond to these challenges.

Human capital (36%), data availability (31%), regulatory restrictions (25%) and technology limitations (25%) were all listed as the leading internal challenges CFOs are facing, the firm also noted.

Technology was identified as the greatest expense and cost management challenge (at 54%), followed by regulatory compliance (33%), operations (31%) and overhead (28%).

“The turn of the cycle frees up insurers,” Fell said. “They should use the opportunity to focus on issues, such as developing cost-efficient technology solutions, that can make them more competitive in the long run and offer them some cushion when the cycle starts to soften again.”