EIOPA’s Market and Credit Risk Comparative Study: Key takeaways
Key takeaways from EIOPA’s comparative study on market and credit risk modelling.
There are four publicly available insurance industry surveys of commercial lines rate changes that are published quarterly.
Details regarding the bases of the four surveys are included in Appendix 2.
There are several standard actuarial techniques including Bornhuetter-Ferguson, Cape Cod, and loss ratio projection methods that require a consistent measure of exposure across past exposure periods. If premium is selected as the measure of exposure, historical premiums must be restated at a common rate level. If a company-specific history of historical rate changes is unavailable, then one of these pricing surveys may serve as a useful proxy to adjust historical premiums to a common rate level.
All four of the insurance industry pricing surveys (CIAB, MB, IVANS, and CLIPS) measure the ratio of rates written during the latest quarter to rates expiring during the latest quarter. However, to adjust historical written premiums for use in the Bornhuetter-Ferguson and Cape Cod methods, we want to know the ratios of the average rates underlying each historical accident year to the average rates underlying the most recent accident year. Therefore, the indices we calculated from the pricing surveys are ratios of the average rates written during the historical 12-month periods ending at each quarter to the average rates written during the most recent 12-month period.
The following rate change and price index histories are based on a compilation of published data and are not provided directly by CIAB, MarketScout, Towers Watson, or IVANS.
In Figure 1, we have used the publicly available data from CIAB, MarketScout, IVANS, and CLIPS to compile composite commercial lines experience for multiple lines of business and to track incremental rate changes from the third quarter of 2010 through the the second quarter of 2020. Each point on the graph represents the average rates written during the 12-month period ending with that quarter, divided by the average rates written during the immediately preceding 12-month period.
Because the latest surveys only reflect premiums written through the middle of 2020, it is unclear whether, or to what extent, the underlying rates may reflect changes driven by the COVID-19 pandemic.
The indicated rate changes for the year ending at any given quarter sometimes vary significantly across the various surveys. For example, for the year ending at the third quarter of 2015 (indicated by the vertical line at 2015.3 in Figure 1), the CIAB composite rate change was -0.6%, the MarketScout rate change was +0.2%, and the CLIPS rate change was +1.7%. Although the incremental 2015.3 price changes in the three surveys differ in magnitude and even in direction, the general pricing trends over time are reasonably consistent among the four surveys.
Figure 2 converts the incremental rate changes from Figure 1 into historical rate indices relative to rates charged during the 12-month period ending with the most recent available quarter (the second quarter of 2020). For example, for the year ending with the third quarter of 2012 (2012.3) the MarketScout index was 0.87, the CIAB index was 0.89, and the CLIPS index was 0.82. Those indices mean that the MarketScout rates for the 12-month period ending with the third quarter of 2012 were 13% lower than the MarketScout rates for the 12-month period ending with the second quarter of 2020, the CIAB rates were 11% lower than the current CIAB rates, and the CLIPS rates were 18% lower than the current CLIPS rates. Figure 2 conveys no information regarding the relationship among the rates reported by the CIAB, MarketScout, and CLIPS respondents (e.g., it does not mean that the MarketScout survey reported higher rates than the CIAB and CLIPS surveys). It only gives information about each survey’s historical rates relative to that survey’s most recently reported rates.
As seen in Figure 1, the CLIPS survey indicates a history of generally larger rate increases and smaller decreases than those reported by the CIAB and MarketScout surveys and therefore the CLIPS line is consistently above the CIAB and MarketScout lines. However, in Figure 2, the CLIPS line is below the other two. This may seem counterintuitive until one considers that Figure 1 compares each historical rate change to the rate change in an earlier (the immediately prior) 12-month period whereas Figure 2 compares the average rates in each 12-month period to a later period (the year ending with the second quarter of 2020).
Figure 1 indicates that property and casualty (P&C) year-over-year rate changes in commercial lines have been trending upward from negative territory since the second half of 2016, with current annual renewal rate increases averaging in the 2% to 5% range. This long-term upward rate trend is due to social inflation driving a combination of increased litigiousness, claimant-friendly contract interpretations, and large jury awards. Going forward, the many unanswered questions and resulting uncertainty surrounding coverage of losses related to COVID-19 may exert additional upward pressure on insurance rates, particularly business interruption and workers’ compensation.
All of the individual lines of business underlying the composite rates in Figure 1 have been trending upward since 2016 with the lone exception of workers’ compensation. As seen in Appendix 1, workers’ compensation rates have been decreasing at roughly 1% to 3% per year since early in 2016, although the latest survey results indicate that the workers’ compensation market may now be starting to harden. The tentative rise of workers’ compensation rates (or at least the slowing in decreases), will likely be accelerated as the pressure increases on the insurance industry to absorb some portion of the economic loss generated by COVID-19.
Selected lines, including workers’ compensation, that underlie the composite results in Figures 1 and 2 are shown individually in Appendix 1.
For each line of business there are two graphs. The first graph shows historical rate changes relative to the rates written in the preceding year. The second shows the ratios of the historical rates to the current rates.
The data underlying the preceding rate changes and price indices are derived from four publicly available insurance industry surveys that are published quarterly.
The Council of Insurance Agents and Brokers (CIAB) represents 200 of the top commercial insurance and employee benefits brokerages worldwide who place 85% of U.S. commercial property/casualty insurance premiums. CIAB compiles a quarterly P&C market index survey which provides rate changes for individual commercial lines of business.
MarketScout is an insurance distribution and underwriting company in Dallas.MarketScout publishes its quarterly Market Barometer which provides rate changes for individual commercial lines of business and also on a composite commercial lines basis.
IVANS is an insurance exchange that publishes the IVANS Index, a quarterly premium renewal index.
Willis Towers Watson publishes its Commercial Lines Insurance Pricing Survey (CLIPS), which compares prices charged on policies underwritten during a given calendar quarter with those charged for the same coverage during the same quarter of the prior year.
The publicly available CLIPS results provide rate changes on a composite commercial lines basis but not for individual lines of business. Willis Towers Watson makes the individual line of business results available only to its survey participants.