We are a pessimistic lot by nature but the mood in the insurance market as full trading resumes this week is more gloomy than usual for this time of year. Reinsurers were battered on price and treaty conditions during the recent renewal season; the patchy rally in some US commercial rates has come to an abrupt halt; and premium levels in almost every other geography and product line continue their journey south. Already many companies and syndicates will be worried about not achieving business plan levels of growth and profitability in 2014.
To outsiders all this may seem hard to fathom. The global economy is showing genuine signs of life following a prolonged downturn. The politicians are reminding us that the recovery remains fragile but a return of business confidence is now palpable. Our friends elsewhere will be embracing 2014 with more enthusiasm and not for the first time the insurance cycle looks out of step with the world beyond its borders
Healthy, expanding businesses will demand more policy coverage which should be good news but unfortunately growth is tapering off sharply in the developing world where low levels of market penetration provide the biggest opportunity for insurers. Worse still, as ever, on the supply side of the industry the mountain of surplus capital sloshing around continues to exert huge negative pressure on pricing.
Received wisdom is that the shake-down following the payment of a huge catastrophe event claim, or series of them, offers the best prospect of burning off capital. A couple of windstorms in 2014 of the ferocity of Typhoon Haiyan or Cyclone Phailin smashing into more densely insured coastlines would undoubtedly hit the industry’s balance sheet hard. Yet the losses would have to be real whoppers such is the volume of excess capacity in the industry.
An alternative theory of the modern time is that the new-style pension and hedge fund providers of capital will retreat from insurance with their money when higher interest rates make traditional asset holdings more attractive. Unfortunately, according to the Bank of England November inflation report an increase is unlikely before mid-2015 or much later than that according to many economists. There is little of immediate encouragement here either therefore.
Of course a soft market like the inclement weather currently is only an issue for those who get wet. It is mostly loss-making companies who cut-back and when enough of them do so sentiment does the rest and prices go up. Earnings pressure can reverse a market and with RSA and QBE joining the likes of Tower in reporting significantly lower levels of profit and balance sheet impairments in the last few weeks, some early signs of margin strain in the system might be evident.
A safe new-year prediction is that we shall see more insurers getting into trouble, paying the price for over-expansion. That there will be enough of them, sufficiently pained, to harden up the market in 2014 is a much longer shot. Sadly the agony etched on insurers’ faces looks set to continue for some time.