A common theme on second quarter earnings calls was that US commercial rate increases are moderating but remain above loss cost trends.
For example, Axis Capital president and CEO Albert Benchimol’s summary was typical: “Market conditions are still favourable and while, as expected, the rate of increase is declining, we continue to achieve meaningful increases across nearly every line we write and remain, on the whole, ahead of loss cost trends.”
Benchimol said that Axis achieved Q2 rate increases in its insurance book of close to 10 percent – the 19th consecutive quarter of rate increases, which now in aggregate exceed 50 percent since the beginning of 2017.
By class of business, Benchimol said professional lines once again saw the strongest pricing actions with average rate increases of more than 16 percent. However, this included some interesting divergence in pricing trends, with cyber up 62 percent but public D&O falling 15 percent while the rest of the professional lines book was up almost 7 percent.
Axis’s casualty lines averaged increases of over 7 percent, as did property, while the other specialty lines book experienced single-digit rate increases.
On Arch Capital’s second quarter earnings call, CEO Marc Grandisson highlighted that “P&C rate hardening continues in many lines”. And he stressed the importance of keeping in mind that “we’ve been able to achieve compounded rate increases meaningfully above loss cost trends for the last two or three annual renewals and, as such, healthy margins of safety have been created”.
Grandisson added: “We believe this attractive level of expected returns should remain in place for the next few years.”
On another Bermudian (re)insurer’s earnings call, Everest Re president and CEO Juan Andrade revealed that his company in Q2 achieved insurance rate increases of 7.3 percent excluding workers’ compensation – down from 9 percent in Q1 2022 – with high single-digit increases in property, professional lines, umbrella and commercial auto.
“These rates remain well above pre-pandemic levels,” Andrade said. “It’s also important to note that in addition to renewal rate change, there are other levers we deploy to ensure that margins continue to expand, such as coverage, terms and conditions, limits management and attachment points, risk selection, new business pricing – which continues to be higher than renewal pricing – and the benefit of additional premium from inflation-sensitive exposure basis.”
Andrade noted Everest has seen strong growth in its US casualty, specialty lines and in its international business, and continues to see significant opportunity in the E&S space.
Loss cost assumptions revised
Evan Greenberg, chairman and CEO of Chubb, said market conditions in Q2 “remained favourable overall, while the level of rate increases is moderating”.
Chubb’s North America commercial lines rates increased by 7 percent (compared to 8.7 percent in Q1 2022 and 10.5 percent in Q4 2021), while total pricing, which includes rate and exposure, increased over 10.5 percent.
“The rate environment is naturally becoming a bit more competitive, particularly in certain casualty-related classes as more carriers seek to now grow,” Greenberg added. “The market is reasonably disciplined, and I expect it will remain so given not only the spectre of loss cost inflation, but the presence of other risk exposures such as climate change, the war in Ukraine, the litigation environment, cyber and the overall cost of reinsurance.”
He added: “There are plenty of reminders to managements to get paid for the exposure underwritten.”
However, while price increases moderated in the quarter, loss cost trends were increasing. Greenberg said additional rate is required primarily to keep pace with loss costs, “which are hardly benign”.
In anticipation of rising costs, Chubb increased its loss cost trends in North America from 6.0 percent in Q1 to 6.5 percent, a figure that Greenberg said should be compared to the 10.5 percent increase in total pricing in Q2.
Chubb is trending loss costs for short-tail classes of close to 7 percent, up from 6.5 percent in Q1.
Greenberg said the market is on one hand becoming more competitive as companies want to grow in what is an adequately rated environment, while on the other hand insurers are also having to react to loss cost trends and inflation.
“The market is rational to me at this time, even though it’s becoming more competitive,” Greenberg said. However, he added: “On the margin, there are people doing dumb things.”
Chubb was not alone in increasing loss cost assumptions.
Mark Lyons, global chief actuary and head of portfolio management for AIG, said the insurance giant’s North America commercial aggregate loss trend was up to 6 percent in Q2 compared to 5.5 percent in Q1 2022.
Lyons said AIG is seeing commercial property line loss cost trends of roughly 10 percent while for specialty-oriented property lines it is closer to 15 percent, driven by inflationary trends in construction materials, replacement costs, labour and transportation.
“Our view of casualty, bodily injury and the medical side of work comp, though, is unchanged from last quarter,” he added.
AIG’s global commercial rate increases were 7 percent in Q2. North America commercial achieved 7 percent rate increases with some areas achieving double-digit increases led by Lexington.
“In the aggregate, rate continued to exceed loss cost trends,” said AIG chairman and CEO Peter Zaffino. “This is the fourth consecutive year in which we’re achieving rate above loss cost trends and where we are successfully driving margin expansion,” he said.
Loss costs trends won’t always be covered
CNA chairman and CEO Dino Robusto warned on his company’s earnings call that “we don’t assume we will cover our long-run loss cost trends every year going forward”.
“In periods when loss cost trends have been increasing, essentially doubling to about 6 percent in the last four years in our portfolio, the pace at which the rate adequacy target moves is also changing,” Robusto said. “So we view this period in the cycle as a time to opportunistically continue pushing very hard for rate and balancing the rate retention dynamic in ways that will grow our P&C profit dollars.”
The executive pointed to CNA’s commercial rate increases remaining steady at 5 percent in the second quarter when compared to the first quarter of this year, and down only 1 point from the third and fourth quarters of 2021.
“So pricing dynamics, by and large, continue to reflect rationality in the marketplace,” he said.
Robusto added: “We think that rates have been moderating in a measured way, and we expect to see some up and down movements across the various lines, influenced by how loss cost inflation, cat exposure and overall economic conditions continue to play out.”
The Hartford chairman and CEO Christopher Swift noted on his company’s earnings call “there has been much commentary about written renewal rates versus loss cost trends and the impact of inflation”.
The Hartford’s loss pick assumptions reflect trends in the aggregate of approximately 5 percent excluding workers’ compensation, which has remained steady in the past few quarters. Swift said the loss trends reflect The Hartford’s overall business mix, which skews towards small business and middle market risk.
The insurer’s Q2 pricing increase excluding workers’ compensation was 6.1 percent, which was about 1 point lower than in the first quarter. “Therefore, we have approximately 100 basis points of spread between written renewal pricing and loss trends,” Swift said.
The Hartford’s workers’ compensation price changes remained positive in Q2 but declined slightly.
Some evidence of price increase acceleration
The feedback about moderating price increases is backed up pricing indices maintained by brokers and others.
MarketScout’s US commercial property casualty barometer showed a 5.9 percent increase in Q2, down slightly from 6.0 percent, while Marsh’s Global Insurance Market Index showed price increases for the US of 10 percent in Q2, down 2 points from Q1.
In contrast, the Council of Insurance Agents and Brokers’ market survey showed price increases ticking up again in Q2 to 7.1 percent, from 6.6 percent in the first quarter.
Travelers chairman and CEO Alan Schnitzer described a “rational and stable pricing market”, as signalled by his company’s 86 percent Q2 retention rate.
Travelers also reported its quarterly business insurance renewal rate changes were up sequentially in Q2 for ex-national accounts, select accounts and middle market. For example, middle market business was up 10.2 percent, compared with 8.8 percent in Q1 2022 and 9.3 percent in Q2 2021.
Some executives believe loss cost trends should serve to maintain discipline in the market.
Markel co-CEO Richie Whitt said that exceptions to the rate moderation include cat-exposed property and lines such as aviation, terrorism, war and political violence, which have been impacted by the Russia-Ukraine war and other recent large events.
The executive continued that going into 2022 Markel had already baked more inflation into its pricing and loss reserving.
“As we enter the second half of the year with continued signs of inflation, we have adopted an even more cautious approach,” he said. “Most of our products’ pricing basis is impacted by inflation, and this helps to some extent to offset claims trend.”
Whitt continued: “However, we are not prepared to rely on this to maintain rate adequacy. We are going to continue to push for what we believe are must-have rate increases. We believe we are going to have success pushing for these rate increases as all responsible and disciplined insurance market participants must pursue rate increases to stay ahead of claims inflation.”
Whitt said he now believes the favourable market conditions will continue through the second half of the year and in 2023. “But we have entered without a question, a more nuanced phase of the current market cycle,” he said.
This nuance means that pricing in some lines may moderate while others accelerate.
WR Berkley president and CEO Rob Berkley said that he saw nothing in pricing trends that will derail the opportunity to grow the business, especially in specialty and E&S.
“We need to remember that product lines are not marching in lockstep these days,” he said. “So for example, it is our view that over the next 12 to 24 months, you are going to see the workers’ comp market likely bottoming out and beginning to firm. That’s one of the, if not the largest, components of the commercial lines marketplace.”
Berkley said that property cat is one of the product lines that is getting the most robust amount of rate, adding that it has been most underpriced for an extended period of time.
On the Axis call, Benchimol had commented that his company feels “the vast majority of lines are adequately priced at this moment”.
“However, we also know that our industry is experiencing an all-in loss trend in the high single digits when all factors are considered,” he said.
The executive noted the uncertain environment resulting from economic instability, the Russia-Ukraine war and lingering impacts of Covid-19 and social inflation.
“It’s therefore imperative that our industry keeps pricing in line with these loss trends to protect our margin,” Benchimol said. “On the positive side, our industry has a comforting historical record of adjusting to inflation and pricing to reflect those loss cost trends. For these reasons, we expect that, on average, our industry should sustain pricing at above loss cost trends through 2023.”
He added: “We’ve already seen some lines reaccelerating in light of new data and conditions, and I believe that this reflects the discipline we expect to see in this market.”