While North American property & casualty (P&C) insurance chief financial officers (CFOs) said financial performance, capital base and rate inadequacy are the driving forces of the market, their views on those factors differ based on their overall market outlook.
Whether they believe the current market is soft, at the bottom of the cycle or hardening, CFOs are predicting that current market conditions will impact financial performance and result in increased mergers and acquisitions (M&As), according to data from State of the Insurance Market, the inaugural P&C CFO survey from global professional services company Towers Watson (NYSE, NASDAQ: TW).
The survey results also suggest a story of two quite different markets, at least as they stand today: a property market that is signaling a hardening in the near term and a casualty market that, while soft, is showing signs of turning around within two years. A full 74% of CFOs believe standard property market prices were at the bottom or turning upward. And while 87% of the CFOs believe the casualty market is still soft or at the bottom of the cycle, 80% of these CFOs said it is within two years of hardening.
Further, CFOs believe the likely outcomes of the current property market will be changing rate levels (63%), improving financial performance (50%) and additional M&A activity (35%). Turning to the casualty market, CFOs believe the key outcomes of the current market will be deterioration in financial performance (48%) along with increase levels of M&A (38%).
“CFOs are anticipating winners and losers as a result of the soft market we’ve been through, and are predicting that those companies that do not emerge in a strong financial situation could be targets of an acquisition,” said Bruce Fell, a managing director of Towers Watson’s Risk Consulting and Software business. “This could change the landscape of the market as the stronger companies increase market share.”
The survey also indicates that the vast majority of respondents believe reserve redundancies continue to exist, and more than half said these redundancies will not be exhausted for over a year. Just under half of the survey participants believe it will be over a year before capital starts to erode. However, the majority of CFOs believe that incurred loss and loss adjustment expense ratios will increase in 2011 on both an accident-year and a calendar-year basis.
While it is premature to signal a turn in the market, Towers Watson’s most recent Commercial Lines Insurance Pricing Survey (CLIPS) tends to support the CFOs’ assertions that they are increasing both property and casualty rate levels. Following several quarters of generally flat commercial lines prices, the second quarter 2011 CLIPS results show a modest uptick in rates for both property and casualty lines.
“Clearly, there are differences between the property and casualty markets, yet it does seem we are approaching a turn in the overall marketplace. P&C insurers continue to face an uncertain economic climate, low investment yields, the impact of major catastrophes and expected increases in loss ratios,” said Fell. “We see these all as potential drivers for rate increases, and in some areas, especially the property market, it appears that a majority of CFO’s believe it is beginning to happen.”
For further information and additional survey findings, please read the State of the Insurance Market.
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