And while there are signs of an easing of rating momentum, that’s what it is: an easing.
Further, all of the public (and private) market commentary continues to point towards a gentle drift down, not a cliff edge, with broad-strokes forecasts that rate action will extend into 2023.
Making predictions about the amplitude, duration and timing of cycles always exposes you to the risk of looking foolish.
But had it been possible earlier in the hardening phase to coax people into calling it, it’s a good bet almost no-one would have called rate-on-rate-on-rate-on-rate-on-rate. Maybe call it rate5 for the sake of concision (and you could add another round at least if you count very modest nominal rises through 2018).
And as we consider this prospect, it is worth noting that the lagged effect of rate increases means that we are talking here about rate rises that will be earning through in 2024.
So peak margins should still be some way off, all else being equal.
Despite this, Chubb put up a 14.4% ROE in 2021, helped by an 89% combined ratio, with Travelers posting a 13.7% ROE on a 95% combined ratio – all in a year with industry cat losses of in excess of $100bn and personal lines challenges. WR Berkley achieved a 16.2% ROE, driven by a 90% combined ratio, pointing to even more favorable conditions for specialty carriers. And this also ignores the balance sheet repair that carriers will privately admit is going on.
Writing for an industry audience it is really easy to navel-gaze, and lose the client perspective. But, it is worth considering the way in which five rounds of rate rises, a few of them double-digit rounds, are likely being received by insurance buyers.
Unhelpfully for the industry’s reputation, the upward march has also come alongside a succession of other challenges, including the early shocks of the pandemic, the wholesale rejection of Covid-19 BI claims by insurers and more recently against the backdrop of the inflation crisis.
Of course, there is always likely to be tension in a relationship like this, particularly around price where the two sides are playing a zero-sum game.
The more puzzling question around the rating environment is: Where is the broker backlash?
Listening through the Q4 earnings calls, the brokers were if anything expecting a more buoyant rating environment than their carrier counterparts. For examples of this, see the AJ Gallagher and Brown & Brown calls.
Now, of course, the audience on an earnings call is the investor community looking to understand the growth outlook, not clients seeing to understand market dynamics. But I would hazard that the matter-of-fact tone around the rate rises must be very aggravating for any clients that do listen in.
The (largely) missing message and tone was captured really well by Marsh Specialty president Lucy Clarke – a famously passionate client advocate – on Voice of Insurance’s access-all-areas podcast.
“Our perspective on those price increases for our clients, in probably one of the most stressful environments that they have ever been in: enough is enough, and so we are pushing back really hard.”
Enough is enough.
As rate rises come round a fourth time, brokers should be picking up their swords and shields and going into battle to end this hardening phase.
The industry’s brokers are typically incredibly shrewd and skilled at getting good deals for their clients.
And so perhaps there is no way to put the market under sufficient pressure to turn the tide as inflation fears mount, cat loss trends worsen and carriers beat the social inflation drum.
But if that is so, at minimum the brokers have to make clear that they are mad as hell that these are the rate rises they are having to bring to their clients.
Fail to do that in an industry where intermediaries are often paid on a brokerage basis, and difficult questions are going to start coming about alignment, given that this third year of the hardening market has been characterized by surging broker growth.
All of the money to turn the brokerage supercycle comes from one source ultimately – clients – and they can’t be happy to see their own fortunes on their insurance cycle diverging so significantly from that of their broker partners.
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