Three reasons why the hard market may drag on for years

Commercial clients are likely to see big price hikes at least through 2021 and the economic impact of COVID-19 is partly to blame, a Bermuda insurance executive suggests.

“We saw double-digit rate increases in our Canadian specialty business,” Albert Benmichol, CEO of Axis Capital Holdings Limited, said during a recent earnings call.

Hamilton, Bermuda-based Axis has a Toronto branch office. Worldwide, the insurer increased its commercial primary rates by an average of 15% in the most recent quarter, compared to 10% in the first quarter of 2020 and 7% in the second quarter of 2019, Benmichol said of Axis Capital’s commercial primary business. Axis is also a reinsurer.

For the property and casualty industry as a whole, some are predicting the current price increases will continue into 2021 and perhaps into 2022, Benmichol said July 29 during a conference call discussing Axis Capital’s financial results for the three months ending June 30.

“First, we are dealing with an underlying social inflationary period that is putting pressure on prior year reserves and adds uncertainty to outlook. Second, interest rates are about as low as they have ever been, creating substantial headwinds for investment income. And third, it is our expectation that the effects of COVID-19 and its economic repercussions will be felt over a number of years. These are not Axis-only issues,” Benmichol said during the earnings call.

For Axis Capital’s primary business, the average rate increase is more than 30% in excess casualty and 11% in primary casualty.

“We are now into 11 consecutive quarters of rate increases,” Benmichol said of Axis Capital’s commercial primary business. “Even cyber and tech, long laggards in pricing, are starting to show rate increases.”

One of the hardest-hit lines is directors’ and officers’ liability for publicly-traded companies. In this space, where Axis writes mostly excess liability, price increases averaged 60% on renewal in 2020 Q2, Benmichol suggested.

Industry-wide, D&O liability is a concern if the client is publicly-traded. This is because if a share price drops suddenly, directors and officers could be sued by shareholders alleging the firm misrepresented the true state of its financial affairs. Even if there was no misrepresentation, the cost of defending or settling such lawsuits would normally get picked up by its D&O liability insurer.

Axis Capital reported July 28 a 7.2% increase in gross written premiums in primary insurance from $968 million in 2019 Q2 to $1.038 billion in the most recent quarter. All figures are in United States currency.

The increase was primarily due to increases in professional lines, property, marine and liability lines, driven by new business and favourable rate changes, and partially offset by decreases in credit and political risk, and terrorism lines.

In reinsurance, gross written premiums were essentially unchanged, at about $679 million for both 2019 Q2 and 2020 Q2.

Company-wide, Axis reported a 1.6-point improvement in its combined ratio, from 96.1% in 2019 Q2 to 94.7% in 2020 Q2.

Feature image via iStock.com/wwing