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Six reasons why commercial prices will probably continue rising


January 25, 2021   by Greg Meckbach


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Don’t expect a soft market for your commercial clients any time soon, executives with The Travelers Companies Inc. warn.

Rates on renewal for business insurance were up 8.4% while rates in bond and specialty insurance increased by 12%, Travelers said last week of its financial results for the three months ending Dec. 30.

Travelers also had a 5.7-point improvement in its combined ratio, from 92.4% in Q4 2019 to 86.7% in the latest quarter. Return on equity improved from 13.5% in Q4 2019 to 18.4% in Q4 2020.

With that improvement in results, is there any reason not to think that Travelers is close, if not already, at a peak with pricing increases in business insurance? This was a question posed on Jan. 21 by an investment banking analyst during a conference call discussing Travelers’ financial results for the fourth quarter and full year of 2020.

Rate increases are likely to persist “at levels that will result in expanding margins for a while,” Travelers CEO Alan Schnitzer replied.


He also warned of headwinds affecting the P&C industry as a whole. “From here, I think this plays out for a while and it’s a function of rate adequacy,” Schnitzer said of rate increases. The drivers include weather losses, wildfires, social inflation, low interest rates, hardening conditions in the reinsurance market and losses arising from the COVID-19 pandemic, he suggested.

For the fourth quarter of 2020, Travelers reported an underlying combined ratio of 88.7%, a 3.4-point improvement from 92.1% in Q4 2019. The underlying combined ratio strips out prior reserve development and catastrophe losses.

Of the 86.7% combined ratio in Q4 of 2020, there were 1.2 points of net favourable prior year development, while 5.5 points was for catastrophes net of reinsurance. So the combined ratio would have been 1.2 points higher, were it not for favourable prior-year development.

Catastrophes affecting Travelers last year included Hurricane Zeta, which made landfall Oct. 28 in Louisiana.

Travelers officials were asked Jan. 21 about business interruption losses from the COVID-19 pandemic and whether a ruling released Jan. 15 by the Supreme Court of the United Kingdom could have an impact. “Our view on our business interruption exposure remains unchanged,” replied Schnitzer.

In July of 2020, Schnitzer said most Travelers BI policies have virus exclusions and also require losses to be caused by direct physical damage to property from a covered cause of loss.

During the Q2 2020 conference call in July, Schnitzer said Travelers does not expect many BI claims from COVID to actually pay out.

The U.K. Supreme Court decision released Jan. 15 was over a test case launched by the British Financial Conduct Authority. The FCA took eight insurers to court over 21 policy wordings that the insurers said should not cover the COVID-related business interruption losses.

The British court ruling was largely against the insurers with respect to the 21 policy wordings, none of which require physical loss or damage to premises. Instead, those policies cover either BI arising either from a “notifiable disease” within a certain distance of the business, or BI from an action on the part of a government or civil authority preventing access to or use of the premises

“There is nothing in that FCA decision in Europe that has caused us to think any differently about our exposure or the reserves that we put up for it,” Schnitzer said on Jan. 21 of the Travelers business interruption coverages.

 

Feature image via iStock.com/champc


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1 Comment » for Six reasons why commercial prices will probably continue rising
  1. Eric says:

    Assuming all else remains equal, if money supply increases, prices will go up.

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