Aon Risk Solutions
Market Report 2012
Table of Contents
1 Background
3
2 Market Developments in the Classes of Insurance
4
2.1 Property Insurance
4
Facts and Figures Outlook
2.2 Liability Insurance
4
Facts and Figures Outlook
2.3 D&O Insurance
5
Facts and Figures Outlook
2.4 Marine Insurance
6
Facts and Figures Outlook
2.5 Engineering Lines
7
Facts and Figures Outlook
2.6 Group Accident Insurance
7
Facts and Figures Outlook
2.7 Automobile Insurance
8
Facts and Figures Outlook
3 Conclusion
9
1 Background
Analysts assume that 2011 is the worst year of all times in the history of insured claims. The natural disasters in New Zealand, Australia and Japan have seriously affected the insurance industry. The amount of insured losses caused by earthquake, storm or flood totalled USD 105bn. The resulting economic loss exceeds this sum several times over.
Only a few years ago insurers were able to compensate underwriting losses by means of their cash investment policy, at least to a certain extent. However, the continuously low interest rates are having an adverse effect on insurers' capital investments, since the low profits from investments are not sufficient for a compensation of underwriting losses. This situation is aggravated by the European sovereign debt crisis, because insurers are to a considerable extent involved in the capital markets of the countries concerned.
It remains to be seen whether and to what extent the amounts invested in the countries concerned will be affected by a debt cut in those countries.
Nevertheless there seem to appear some bright spots on the horizon for insurers in this market phase: in the countries affected by natural disasters efforts to obtain higher premiums are increasingly successful, at least in those countries and for lines with considerable claims ratios. We estimate that these efforts may result in an average increase in premium levels of up to 10 % across all lines. In highly affected regions such as Eastern Australia premium increases of well over 50 % are reported.
The situation on the German insurance market in 2012 is not yet clear, as can be seen from the lines analysis below. Insurers are still acting differently and unequivocally, depending on the line.
During the 2012 renewal phase efforts to improve the loss experience were headed by automobile insurance – the line with the highest premium volume. In the past automobile insurers have always been first in initiating this development and in setting the market trend. Will this be an indicator for the way the other market participants will act in 2012?
We do not think so, because today insurers are acting in a considerably more ambiguous way and frequently against the market trend with a view to future underwriting profits. This leads to a significant weakening of the amplitudes of the market cycles. Whether a change of syndicate will help a client to avoid a restructuration of its insurance cover will have to be determined on a case-by-case basis. The credit requirements to be observed by lead and participating insurers might become the cause of preventing the market from making available alternative quotations.
At the same time 2011 was characterized by the introduction of so-called sanction clauses, by which insurance cover for products or services, nations, organizations or persons on which sanctions are imposed is excluded. New sanctions which affect the insurance cover automatically are included by declaration under the sanction clause used by Aon. No risk is excluded beyond the extent of the applicable sanctions.
2 Market Developments in the Classes of Insurance
2.1 Property Insurance
Facts and Figures
For the insurance of industrial, commercial and agricultural risks a 1.5 % rise of the premiums to EUR 5.7bn is expected for 2011. Claims expenses will rise by 11 % as compared with the previous year
to approximately EUR 5bn, which corresponds to a claims ratio of 87 % (79.4 % in the previous year). The combined ratio will be about 110 % (previous year: 102.5 %).
Outlook
In industrial property insurance the situation has changed slightly compared with the previous year. Although there is still no trend reversal throughout the industry, the market is no longer willing to provide capacity for risks where the premium is already at rock bottom level or for risky business operations to an unlimited extent.
Insurers have changed their underwriting policy insofar as, even where desirable business operations are concerned, the individual client's loss prevention and/or fire fighting measures and loss experience are taken into account in pricing to a markedly greater extent.
In markets where numerous carriers offer coverage a certain competition regarding lead quotations is still noticeable. Although attractive lead quotations will thus continue to be available, it has to be expected that, due to insurers' changed underwriting policy, a completion of the line slip at a uniform
price will no longer be possible in all cases. In the past renewal phase we were confronted with a situation where renowned insurers left the syndicate because the lead insurer had agreed a minor premium reduction. Not in all cases were we successful in making new insurers join a syndicate at equal conditions.
However, only a very limited number of underwriters is available for high-risk businesses. Insurance cover for unprotected high-risk businesses will be possible only at higher premiums, a considerable share of self-insurance and strict fire protection requirements. Now as before it is true that the higher the limits or the more international a risk, the narrower the market.
In view of the occurrences in Japan and Thailand it has to be expected that the capacity for natural perils will tighten.
2.2 Liability Insurance
Facts and Figures
In 2011 the gross premium income for general third party liability insurance as more or less at the same level as in the previous year (EUR 6.9bn in 2011 (+2 %), not including liability for nuclear risks, aviation and spacecraft risks and E&O/financial loss liability).
Claims expenses of EUR 4.7bn will be slightly lower than in the previous year. As in the previous
years there were no significant major losses in 2011. The average claims ratio in general third party liability insurance is 69.5 %. The German Insurance Association (GDV) does not provide separate statistical data for industrial liability insurance.
Based on our experience we expect a minor rise in the 2011 claims expenses in industrial liability insurance compared with the previous year.
A minor rise in the number of claims is also expected. Despite the economic upswing the premium income from industrial liability will be reduced by approximately 5 % compared with the
previous year. The main reason for the continuing decline is the continuing fierce competition, particularly in the Mid Market and SME sectors.
Outlook
We expect the fierce competition in industrial liability insurance to continue unchanged in the Mid Market and SME sectors, leading to further premium reductions and broader insurance conditions. This is also due to the insurance cover still being provided
mostly on occurrence basis, which makes it difficult to assess the results of any particular annual period. Premiums and conditions for major and global clients will remain as in the previous year.
2.3 D&O Insurance
Facts and Figures
So far no official data from the German Insurance Association regarding the development of D&O insurance business have come in yet. As in the past year, the number of claims reported remains on a high level. This is again due to the repercussions of the financial crisis and its aftereffects on the overall economy, for example reorganization, restructuration and insolvencies of insured companies. A general trend towards making claim within the organizations is perceptible. Due to, among other reasons, stricter compliance requirements, supervisory bodies pursue alleged breaches of duty of directors and officers and enforce claims. In many cases claims are made against retired directors and officers. With a view to their own liability supervisory bodies increasingly review D&O policies.
In some cases it was considered to make claims against directors/officers of companies affected by the natural disaster in Japan. It is conceivable that claims arising from insufficient insurance cover may be made under the D&O insurance. In practice, however, no claims of this kind have been filed by insured companies so far.
D&O insurers' reaction to the larger number of claims or circumstances reported is a detailed review of the proposals for insurance cover. In cases where cover is confirmed, it is often provided for defense costs but not for payment of an indemnity. The main issue is the defense of unjustified claims.
Outlook
The underwriting policy of D&O insurers has become more differentiated. There is a tendency among insurers to evaluate D&O risks more carefully. In particular they concentrate on indicators such as claims made in the recent past or circumstances where a loss potential might be involved. In respect of supposedly favorable risks premium reductions by a one-digit percentage are still realizable, particularly for small and medium size companies. Where major groups are concerned this depends on the individual case. Also in part of the financial services sector some premium reductions are realizable. This is due to the hardened market in consequence of the financial
crisis and to the premium increases that resulted in this sector.
Insofar as conditions are concerned the trend towards broader insurance conditions continues. This causes the D&O insurance to mutate into a comprehensive cover for managers that includes not only the claims made but also the indirect consequences a manager is likely to suffer. The question whether the premium for such an insurance involves a non-cash benefit will have to be examined on a case-by-case basis. By acting thus insurers drift away from the compromise with the tax authorities
arrived at in 2001. In respect of the above mentioned difficult risks, however, restrictions in insurance conditions or even reductions of the shares that are written by insurers are witnessed. This development results from the D&O insurers' loss experience in the recent past. In addition insurers have to spend more money on the reinsurance of such risks because the discovery period was extended. The situation will probably be aggravated by the capital adequacy requirements under Solvency II. Whether this will induce a tendency towards a hardening market will have to be seen in the current year.
Compliance aspects are increasingly moving into the focus of companies when a D&O insurance
is to be taken out. In addition to the broad cover for infringement of compliance rules this is true particularly regarding the structure and design of international D&O insurance cover.
The market still fails to offer convincing solutions that put an end to the limit for the insurance of the personal deductible of the person concerned being added to the limit for the company and to provide a comprehensive cover instead. Solutions for the extended limitation periods regarding claims against members of the board of management of listed stock corporations and financial institutions are offered meanwhile.
2.4 Marine Insurance
Facts and Figures 1
In 2010 the marine insurance lines achieved a gross premium income of EUR 1.775bn (previous year: EUR 1.689bn). This increase is not due to a premium increase but to the integration of aviation and spacecraft insurance into the statistics. Adjusted for the premiums for aviation and spacecraft insurance (EUR 111m) another slight decline in the premium income of marine insurance was recorded.
The premium income from cargo insurance again dropped considerably: from EUR 709m in 2009 to EUR 648m in 2010 (-8.6 %). It cannot be determined definitely whether this is due to the aftereffects of the economic downturn at the end of 2008 and in 2009 which were reflected in the premium adjustments prepared in 2010 for the turnover-based policies of 2009 or whether this development was caused by further premium reductions.
The development of loss ratios does not show a
uniform picture. The preliminary loss ratio rose to 84 % (2009: 78 %), whereas the absolute loss reserve is less than EUR 18m below that of the previous year. Contrary to the development in the previous year, the trend towards a deterioration of loss ratios has not been confirmed by the settled losses over the years: there is a clear downward trend in the loss ratios after settlement of the preceding years (2007: -8.8 % / 2008: -4.9 % / 2009: -1.4 %).
In 2010 and 2011 the cargo insurance was also spared from so-called "market losses". The largest individual loss reported in 2010 was EUR 3.6m and thus significantly below the highest losses in the previous year. Significant loss payments by German insurers for losses caused by the occurrences in Japan are not known. Client segments with a particular loss frequency or a concentration of individual causes of loss cannot be gathered from the reported claims.
Outlook
Premium rates have reached an all-time low. However, insurers are invariably willing to compete in writing insurance. As a consequence policies with a poor loss experience are restructured only rather reluctantly. Premium reductions are occasionally
possible, but due to the low premium level they keep within reasonable limits. Sufficient underwriting capacity is available. There is no known case in which a restructuration of a policy was demanded by reason of the occurrences in Japan.
1 The Association publishes the figures of the previous year in May/June of the ensuing year. Until that time data of the year before last need to be resorted to.
2.5 Engineering Lines
Facts and Figures 2
Retrospect | 2010 Results
• 2010 premium income (incl. engineering BI): EUR 1.592bn (+ 3.1 % compared with previous year)
• 2010 claims expenses: EUR 1.152bn (+ 7.4 % compared with previous year)
• 2010 claims ratio after settlement (combined ratio): 89.9 %
Outlook | Expected Result for 2011 | Projection
• 2011 premium income (incl. engineering BI): EUR 1.6bn (+ 1.5 % compared with previous year)
• 2011 claims expenses: EUR 1.2bn (+ 3 % compared with previous year)
• 2011 claims ratio after settlement (combined ratio): 91 %
Outlook
The situation in the engineering lines has changed little compared with the previous years. Now as before no trend change towards a harder market is in sight. As in previous years, market cycles in the engineering lines have not been as pronounced as for example in industrial property insurance. Engineering insurers tend to act more contract-oriented than market-contract-oriented.
The subsidiaries of foreign insurers that have penetrated the German market with their capacities in recent years have established themselves as co-insurers. Now as before, only few insurers are capable of acting as lead insurers for heavily exposed and complex risks.
2.6 Group Accident Insurance
Facts and Figures
The premium revenue from personal accident insurance in general was approximately EUR 6.5bn in 2010. This corresponds to an increase of 1 %. The hard winter caused an increasing number of black
ice accidents. Claims expenses rose by 2.5 %. The combined ratio of 84 % is unchanged compared with the previous
Outlook
The past years have been characterized by a high competitive pressure regarding premiums and scope of insurance cover under group personal accident (GPA) policies. As a consequence the combined claims and cost ratios of some portfolios markedly exceed 100 %. For this reason insurers are approaching clients and brokers for substantial contract restructuration.
This situation gives rise to expectations of pressure
on the present premium levels on the one hand, whereas on the other hand some market participants wish to reduce the very broad scope of coverage under their GPA policies.
It remains to be seen whether this tendency will be implemented by the major part of carriers in 2012. A consolidation on the GPA market in 2012 will be successful only if insurers proceed in a uniform manner.
7 Market Report 2012
2.7 Automobile Insurance
Facts and Figures
With an expected premium volume of EUR 20.9bn in 2011 automobile insurance accounts for the highest premium income of all lines. Automobile insurance is thus by far the largest line within non-life and personal accident insurance. According to the German Insurance Association (GDV) approximately 9.65m insured events were recorded in 2010, for which a total amount of indemnity of approximately EUR 20.06bn was paid. Automobile liability alone accounted for EUR 12.14bn. EUR 6.53bn were paid for comprehensive including collision, EUR 1.394bn for comprehensive excluding collision.
According to the German Insurance Association the average cost per car accident is EUR 3,418
in automobile TPL, EUR 1,420 in comprehensive including collision and EUR 656 in comprehensive excluding collision. Thus the average claims expenses for TPL cover have dropped compared with the previous year. As regards comprehensive cover, theft is still the outstanding problem. 36,551 vehicles were stolen in 2010, causing claims payments of approximately EUR 348m. In comparison with the previous year the number of thefts has dropped whereas the amount of claims payments has risen. Top in the theft statistics is Volkswagen, followed by Audi, BMW and Mercedes Benz. The insurers' average combined ratio was 105 % in 2010. For 2011 a combined ratio of 107 % is expected.
Outlook
For a forecast of the premium development a clear distinction between private and industrial clients has to be made. Whereas in the private clients sector competition is still strong – in 2009, for example, Allianz lost its leading position in the market to HUK-COBURG and the latter was even able to increase its competitive edge, clear signs have been indicating since 2009 that the market for industrial clients is hardening.
After six years in deficit there has been a first trend change in automobile insurance in 2010. Premiums rose by 1 to 2 % on the average. Together with an increased number of registrations this caused an increase in premium income of approximately 3.5 %. The trend change will continue in 2011, because according to the Kraftfahrt-Bundesamt (Federal Motor Transport Authority), an additional 257,000 vehicles were registered in 2011 compared with the year before.
This tendency towards a premium increase is also due to the above mentioned combined ratio of over 100 %. After years of price deterioration where sales figures were all that mattered in the attempt to gain market shares, the tendency in 2010 took a definite turn towards making a profit. Considerable premium
increases were implemented particularly for fleet policies with a poor loss experience. To compensate for the very high total loss in this line, insurers had to change their pricing and underwriting policy completely in 2011. First reactions of the market in the middle of the past year were, among other measures, cancellations of particularly loss-prone fleet policies in the course of the annual period. In the renewal negotiations for 2012 commercial and industrial clients were faced with significantly more demands by insurers for a restructuration than in previous years.
The so-called "trailer ruling" of the Bundes- gerichtshof (Federal Supreme Court) cemented and accelerated the insurers' demands for restructuration, because the consequence of the ruling was a large number of recourse claims among insurers. Already during the annual period the premium rates for these risks were raised by a multiple.
For 2012 a significant increase of insurance premiums for automobile insurance can be expected, since insurers will endeavor to lower their combined ratio to an average of 90 %.
3 Conclusion
Market – Quo vadis?
The market seems to calm down and consolidate, which, along with less capacity, may lead to a financial recovery. The question remains whether or not some of the carriers may want to operate against the trend, either because they do not fully implement the cyclic measures or because they have just discovered their love for anti-cyclic action and therefore build up an alternative market trend.
In general the conditions offered on the market tend to be less broad than previously. To what extent such a turn can be extended in time and whether or not an opposite tendency may arise after some time remains to be seen.
With the multitude of natural disasters that have occurred, 2011 will be entered into the records of insurers as a one in a thousand year. Such an accumulation of extreme losses is very rare.
If during this year and in the years to come natural disasters do not occur to an extent as in 2011, the insurers' annual claims expenses/claims ratio will soon be improving again. It remains to be seen how insurers will act if they achieve good underwriting results. The market trend may be extended, but it may also cool down.
