Is the current hardening rate environment another indication of more positive news in the near term?
With the attention the past months on the pandemic, and most recently on the national conversation for change, little has been reported about the fundamental shifts occurring in the Property & Casualty ("P&C") insurance markets. As referenced yesterday, while the S&P 500 and Dow Jones Industrial Average ("DJIA") are down on a year-to-date basis, per-share value of insurance brokers grew. Additionally, the insurance industry is in the midst of perhaps one of the fastest increasing rate environments since the 1985-1987 “hard market.” According to The Council of Insurance Agents & Brokers in their First Quarter 2020 Commercial Property & Casualty Market Index, the average rate increase across all account sizes was 9.3%. This 9.3% increase has accelerated from a 7.5% increase recorded during the fourth quarter of 2019, and a 6.2% increase reported during the third quarter of 2019. The report goes on to state that this increase is the tenth consecutive average rate increase for all account sizes.
Perhaps even more telling is the breadth of rate increases across all major commercial lines of business (except workers’ compensation). Umbrella and commercial property coverages increased 17.5% and 12.0%, respectively, during 1Q20, eclipsing commercial auto’s 9.6% increase. Commercial auto over the past few years has seen perennial rate increases due to sustained increases in claims severity resulting from distracted driving, increasing physical damage repairs costs, and increased driving mileage. It should also be noted that umbrella and commercial property coverages, typically written in the Excess & Surplus (E&S) lines marketplace, have particularly affected the overall E&S rate environment. Finally, while workers’ compensation rates are still falling, the rate of decrease (1.2%) is the smallest decrease in more than four quarters.
The obvious implication in these sustained rate increases for the immediate future is their potential offsetting effects on any reduction in exposure bases related to the COVID-19 pandemic. Anecdotally, MarshBerry has heard from several broker clients, both retail and wholesale, that rate increases have more than offset the reductions in existing client coverages (and new business). In addition, MarshBerry has also heard from several significant specialty wholesale and Managing General Agent clients that May 2020 commission income is greater than May 2019 income. This trend appears to be particularly amplified for wholesalers, where some MarshBerry clients have indicated that they are seeing rate increases as high as 30%-40% for insureds with recent losses.
This is all to say that the current market environment is perhaps more encouraging than just a few weeks ago. As we have mentioned in prior ViewPoint blogs, the current P&C marketplace is markedly different from the 2008-2010 experience. During 2008-2010, P&C rates were falling, and unemployment continued its downward trajectory for many months. In today’s environment, P&C rates are up substantially, and the U.S. economy has already witnessed a reduction in unemployment from 14.7% (April 2020) to 13.3% (May 2020) after only two months1. Wall Street reacted particularly positively to this news, with the DJIA up over 800 points on June 5, 2020, followed by a 461 point increase the next day (June 6, 2020).2
Perhaps this current hardening rate environment is just another indication of more positive news in the near term? Stay tuned…
If you have questions about Today’s ViewPoint, or would like to learn more about activity in today’s marketplace, please email or call Gerard Vecchio, Senior Vice President, at 212.972.4886.
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1Department of Labor