Total Cost of Risk Drops for Third Straight Year, RIMS Finds

Despite the challenges of a slowed economy in an election year, a shifting risk landscape as a result of technological advances, and a slow to negative growth rate in some sectors, 2016 saw the total cost of risk (TCOR) decline for the third consecutive year, according to the 2017 RIMS Benchmark Survey.

Even in the face of such uncertainties, the TCOR per $1,000 of revenue continued to drop, ending at $10.07 in 2016. The main drivers were declines in all lines excluding fidelity, surety and crime costs, according to the report. TCOR is defined in the survey as the cost of insurance, plus the costs of the losses retained and the administrative costs of the risk management department.

The survey encompasses industry data from 759 organizations and contains policy-level information from 10 coverage groups, subdivided into 90 lines of business.

Uncertainty around policies in the new presidential administration will continue to dominate in 2017, as the nation’s trade policy, regulatory reform and tax system could see changes, RIMS reported. The new political regime is also expected to reduce regulatory oversight at the state, federal and international levels.

Key findings from this year’s RIMS Benchmark Survey include:

  • Technological advances have caused a seismic shift in the risk landscape, creating new types of claims and forcing insurers to consider new products and solutions for customers.
  • Insurers ended 2016 with average capital and surplus at the highest level in 10 years. However, excess capacity is undermining profitability, as seen by falling net income and return on average equity.
  • The personal insurance space is in the midst of a consumer-centric revolution, offering customers new transaction platforms, better metrics and more flexible pricing and coverage options. Commercial insurance is expected to adopt a similar focus, transforming the way business is transacted.
  • Predicted rate increases for cyber, E&O and workers compensation failed to materialize across the board. Projections for 2017 are more moderate, with property and most liability lines flat to down 10%.
  • Emerging trends in the 2017 risk landscape include the tech revolution, security issues, natural catastrophes and political upheaval.

“The RIMS Benchmark Survey chronicles the evolution of corporate risk management costs over time. This year’s edition highlights how risk managers have effectively managed costs in a time of evolving risks and demands, enabling them to do more with less,” said Jim Blinn, executive vice president of client solutions at Advisen.

Lloyd’s to Establish EU Base in Brussels

One day after the U.K. set in motion its process for withdrawal from the European Union by triggering Article 50, Lloyd’s announced that it has chosen Brussels as the location for its European Union subsidiary.

A market of syndicates in London, Lloyd’s said its intention is to be ready to write business for the Jan. 1, 2019, renewal season. The move will enable the company to write risks from all 27 European Union countries and three European Economic Area states once the U.K. has left the EU. Because Britain remains a full member of the EU for at least two more years, there is no immediate impact on existing policies, renewals or new policies, including multi-year policies written during this period of time, according to the insurer.

In 2015, the EEA accounted for £2.93 billion ($3.66 billion) or 11% of its gross written premium, the organization said.

“It is important that we are able to provide the market and customers with an effective solution that means business can carry on without interruption when the U.K. leaves the EU,” Lloyd’s Chief Executive Inga Beale said in a statement. She added that Brussels met the critical elements of providing a robust regulatory framework in a central location.

“We are a market, we are unique, we are not like an insurance company – we needed to find a regulator with the resources and the bandwidth to regulate the Lloyd’s market,” Chairman John Nelson told Reuters.

Nelson said the Brussels subsidiary would employ dozens of staff in areas such as compliance and information technology, unlike banks that have said they may move hundreds of staff to the EU. The regulated company will also have its own board.

U.S. insurer AIG recently announced it was moving its headquarters from London to Luxembourg, and Lloyd’s insurer Hiscox is in the process of choosing between Luxembourg and Malta.

While the United Kingdom’s relationship with the European Union may have sometimes been a fractious one, the decision by 52% of its voters to leave the world’s biggest single market was an outcome that many experts and businesses did not expect, Neil Hodge wrote in the August 2016 Risk Management Magazine.

A month before the June 23 referendum, the 100 Group, which represents finance directors from the U.K.’s biggest companies, conducted a survey that found that not one of its members supported a British exit—or “Brexit”—from the EU. This view was echoed by Carolyn Fairbairn, director-general of the U.K.’s leading pro-business lobby group, the Confederation of British Industry (CBI). “The decision to leave the EU is not one that business would have chosen to take,” she said. “We know that the majority of our members wanted to stay in.”

P&C Insurers See $1.5 Billion Net Underwriting Loss in 1H

A deteriorated combined ratio seen by insurers along with slow net written premium growth contributed to net underwriting losses of $1.5 billion in the first half of 2016. Insurers’ combined ratio deteriorated to 99.8% from 97.6% in the first-half of 2015, and net written premium growth slowed to 3.0% from 4.1% a year earlier, according to a report from ISO and the Property Casualty Insurers Association of America (PCI).

The Insurance Information Institute’s Steven N. Weisbart explained:

In general, premiums may grow for any or all of several reasons. First, there is growth in the number and/or value of insurable interests (such as property and liability risks). Second, there is an increase in the willingness of buyers who had some or no insurance to purchase or add to their insurance protection, net of those who reduce or drop it. And third, there is an increase in rates (that is, the price per unit of coverage).

Net investment income dropped to $22.1 billion in the first-half from $23.4 billion a year earlier, and realized capital gains decreased to $4.4 billion from $8.2 billion, resulting in $26.5 billion in net investment gains for the first-half, down $5.1 billion from a year earlier.
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Direct insured property losses from catastrophes in the United States totaled $13.5 billion in the first-half, up from $10.7 billion a year earlier—above the $11.6 billion average for first-half direct catastrophe losses for the past 10 years, according to the report.

“The industry’s results continued to worsen in the first half of the year, as insurers reported a first-half net underwriting loss for the first time since 2012 and saw their combined ratio exceed 99%,” Beth Fitzgerald, president of ISO Solutions, said in a statement. “Catastrophe losses remained higher than in previous years. Texas was hit by a hailstorm that has been described as the costliest in the state’s history, and several states in the central United States experienced severe thunderstorms. With interest rates and investment yields remaining low, insurers must find ways to improve operational efficiency while still providing valuable coverage for their policyholders.”

In the second quarter of this year, insurers’ net income after taxes fell to $8.3 billion from $12.9 billion in the second-quarter of 2015, and their combined ratio worsened to 102.1% in second-quarter 2016 from 99.4% a year earlier.

Their annualized rate of return on average surplus dropped to 4.9% in second-quarter 2016 from 7.7% a year earlier. Net written premiums rose 2.9% in second-quarter 2016 compared with 4.5% in second-quarter 2015.

June Commercial Insurance Rates Up 1%

The composite rate for commercial insurance placed in the United States rose to minus 1% in June from minus 2% in May, according to MarketScout. One of the most significant changes was rates for transportation accounts, which moved from minus 2% to plus 1%. Rates for every industry class, except habitation and transportation, moderated by 1%. Habitational rates were unchanged at minus 2%.
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Industry class list

“Insurers are getting tired of cutting rates,” said Richard Kerr, chief executive officer of MarketScout. “There are still pockets of very competitive business; however, it is beginning to look like insurers are willing to maintain the rate reductions of the past few years and not cut rates even further.”

Coverage classifications business owners policies (BOP), umbrella and professional liability all moderated by 1%, compared to the prior month. EPLI rates were up 1% and commercial auto rates moved from flat to plus 2%.
coverage class list
By account size, medium ($25,001 to $250,000) and large ($250,001 to $1,000,000) accounts moderated to minus 1% and 2% respectively. Rates remained the same for all other account sizes.

Account size