New Capacity, Price Adequacy Contribute to Rate Increase Moderation

During the third quarter of 2021, the global insurance market saw the trend of decelerating rate increases that began a quarter earlier continuing, according to a new market report from Aon.

The Aon Global Market Insights Q3 2021 report (Aon, October 29, 2021) notes that new capacity, reduced uncertainty, and insurers' past pricing adjustments have moderated price increases in most lines of insurance business, except cyber insurance.

In an introduction to the report, Rory Moloney, chief operating officer, enterprise client group at Aon, notes that the deceleration in rate increases that continued in the third quarter is driven by the convergence of several factors.

• COVID-19 pandemic-related losses have not yet reached levels feared by insurers and reinsurers.
• Insurers have improved pricing adequacy and portfolio performance over previous renewal cycles and have turned their focus to growth.
• Current pricing levels along with improved portfolio performance have increased the appetite for insuring risks and attracted new capital from both traditional and nontraditional sources.

Mr. Moloney notes that the insurance industry's underwriting processes continue to evolve and have become both more rigorous and more data-driven.

Cyber insurance—particularly for ransomware—has surpassed directors and officers (D&O) and natural catastrophe to become the most strained line of insurance business, he says.

By region, the Aon report says that third-quarter rate increases were in the range of 11 percent to 30 percent in Europe, the Middle East, and Africa (EMEA) and the United Kingdom; North America; and Latin America; and were in the 1 percent to 10 percent range in the Asia-Pacific region.

Current pricing levels have attracted capacity in some lines, with both traditional and alternative sources of capital sufficient for all but the largest risks during the third quarter, the Aon report says. The report found ample capacity in all regions of the world during the third quarter.

At the same time, however, insurers are scrutinizing risks with greater underwriting rigor and stringency, the report says. In many cases, decisions are being made by centralized underwriting teams instead of the local teams that previously had underwriting decision-making authority. The report describes underwriting as "prudent" in North America and the Asia-Pacific region, and as "stringent" in EMEA and the United Kingdom and Latin America.

Changes to limits were driven largely by insurance buyers in response to exposure changes or as part of efforts to manage premium costs, Aon reports. Limits were stable in all regions of the world, according to the report.

"Deductibles remain generally stable, although insurers are increasingly focused on moving away from 'working layer' losses," the report says. Aon found deductibles increasing in EMEA and the United Kingdom and Latin America during the third quarter, while they remained stable in North America and the Asia-Pacific region.

Regarding changes to coverages, the Aon report notes that insurers have already implemented clarifications and exclusions related to infectious disease, cyber, and contingent business interruption, and have minimal interest in changing their positions in those areas. Aon's report found that coverages were stable in all regions of the world during the third quarter except for EMEA and the United Kingdom, where they were growing more restrictive.

By coverage area, Aon found that modest rate pressures remain in the automobile insurance line, despite a favorable 2020. "Exposures have increased as economies have reopened, and loss costs have risen as parts costs have escalated," Aon says. The report describes market conditions as "moderate" for auto coverage in all regions of the world.

For casualty and liability coverages, conditions were moderate with capacity issues continuing for some excess coverage placements, Aon says. Market conditions for casualty/liability lines were moderate during the third quarter in all regions except for EMEA and the United Kingdom, where conditions were "challenging," according to the report.

In cyber insurance, insurers are looking to address profitability concerns associated with increasing loss frequency and severity, particularly related to ransomware attacks, Aon reports. "Significant rate increases, capacity contraction, and ransomware clarifications and sub-limits have become common," the report says. Aon describes the market condition for cyber insurance as challenging in all regions of the world during the third quarter.

In directors and officers insurance, hard market pricing and capacity adjustments have been replaced with more moderate conditions, Aon says. In addition, new capital has come to the market, creating competition. There remain capacity challenges and premium pressures around large limits, however, according to the Aon report. The third-quarter report described the market condition for D&O coverage as challenging in all regions of the world.

For property insurance, while pricing remained challenging during the third quarter, new capacity is stabilizing the market, according to Aon. "Declarations of value and related sums insured have come under scrutiny," the Aon report says. "Robust risk information—including engineering reports—has become a key underwriting consideration." Insurers continue to require restrictions for contingent business interruption, the report says. The report describes third-quarter market conditions for property insurance as moderate in all regions of the world except for EMEA and the United Kingdom, where conditions were challenging, Aon says.

Aon's latest quarterly market report is based on input from thousands of risk managers across 60 countries and 16 industries.