Everyone can see that interest rates are rising. It’s happening in housing, and the Fed is predicting at least two hikes for 2019. But how rising rates will affect the insurance market is anyone’s guess. Take a look at all the factors forming a see-saw of threats and benefits to the marketplace.
Increased Investment Returns
First of all, insurance carriers should begin to experience an increase in investment income returns due to the effects of rising interest rates in 2018 and expected 2019 interest rate hikes. As you know, the carriers are required to hold largely “safe” investment-grade products to back their policies. These investments include short-term CD’s, bonds and Treasury bills. With interest rates remaining at all-time lows for these products over the past several years, insurance carriers have seen minimal investment returns. An increase in interest rates should fuel an upswing in investment returns helping to offset losses.
Offsetting CAT Losses
On the other hand, property lines of business are reeling from recent CAT losses like the California wild fires, coastal hurricanes and flooding. In 2017, for example, insured losses due to natural disasters in the United States totaled $78 billion – more than triple the previous year’s total. And the numbers for last year aren’t in yet. The hope is that the increased short-term interest rates movement will help counteract some of the effects of these devastating losses and help keep rates stable.
Effect on Institutional Investing
Yet another factor to consider is the effect of these changes on institutional investing. In the face of rapidly rising interest rates, many pension plans, nonprofits, mutual funds and other investors may pull investments out of the insurance market in favor of more stable instruments like CDs, Bonds and Treasuries. This could have a negative impact for the commercial insurance buyer because it may force smaller carriers to exit the marketplace allowing larger carriers to scoop up market share. In the end, this will most likely result in decreased market competition causing insurance rates to rise.
Predicting an End to the Soft Market
Many of us in the insurance industry have been anticipating an end to the current soft insurance market cycle for the past few years. However, this just hasn’t happened. The low interest rate environment over the past several years has increased competition in the insurance marketplace (institutional investors flooding money into the insurance marketplace in search of higher returns) which has helped to keep premiums stable even in the face of significant CAT losses.
2019 Predictions by Line of Coverage
My best guess is that 2019 might wind up being the start of a hardening insurance market in some/most lines of commercial insurance coverage. Most likely you will begin to see a tightening of underwriting standards along with rate increases in most lines of commercial insurance coverage.
I expect Commercial Auto coverage to feel the most impact of rising insurance rates due to soaring loss ratios, distracted driving incidents and rising claims settlement costs. I personally believe the commercial auto market has been underpriced for the past few years and carriers are now being forced to price this line of coverage more aggressively to achieve profitability.
Many people might think that Commercial Property coverage would be the hardest hit due to the increased CAT losses in 2018, but this may not be the case. My belief is that Non-CAT property rates will remain basically flat for companies with favorable loss ratios in Non-CAT exposed areas. Some companies could even see rate decreases in certain situations. However, if you have property in a CAT exposed area and/or have suffered significant losses in the past 3-5 years, you may be looking at increases in the range of 10% to 20% or higher.
Due to the increased focus by company executives around safety and loss control, I would expect WC premiums to remain flat or decrease slightly. My concern for WC coverage is how legalized marijuana, increased opioid addictions and higher health care costs will impact this coverage over the next couple of years.
General Liability, Umbrella and Excess coverage is expected to rise slightly in the 2%-4% range. These increases are primarily due to increased litigation, increased class action filings and the increase in settlement sizes.
Cyber coverage should remain relatively flat for smaller companies and larger companies should expect rates to increase in the 2%-5% range.
Again, these are just my own musings, and it will be interesting to see what’s happened 12 months from now. I’d love to hear your thoughts, and I’ll be sure to check in next year!
By Eric Bloss, VP, Commercial Risk Advisor
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