Snapshot of a dynamic market

After a long period of hardening, today’s market reflects shifting risk dynamics, new competitive pressures and changes in the structure and availability of reinsurance.

_{Strong recent results are good news, but there are signs of softening}

Recent market history — strong results amid signs of softening

Prior to 2018, the market had seen rate softening for several years, with most specialty insurance products producing losses. Starting in 2018, and accelerating in 2019, the market hardened; 2024 was the seventh consecutive year of such hardening, though aggregate price increases in 2024 were considerably smaller than in prior years. See figure 1.

Figure 1:

EY London Market premium rate renewal index (net of long run inflation)

Market participants face different implications:

Carriers: With rates adequate and profitability high, it makes sense for insurers to continue pushing for growth and better returns. But it is notoriously difficult to call the point at which rates slip below adequacy. That is especially true when data sets and management information are limited or of questionable quality (as they are relative to AI-related coverages). For many executives, it’s not a question of whether to act, but rather when and at what scale.
Insureds and brokers: Acting on behalf of their insureds, brokers can now fill slips more easily than a few years ago, thanks to the fundamental shift in the balance of supply and demand. Brokers today are in a stronger position relative to a range of value drivers for their clients, from competitive pricing to favorable timing, limits and terms and conditions. In other words, evolving market conditions are impacting factors beyond pricing.

This rate hardening was driven by:

The timing of the market turn varying by line of business (casualty/financial lines first and property last), which prolonged the aggregate impact.
The increasing impact of adverse claims trends in some markets (e.g., social inflation in casualty/financial lines), which led to longer hardening cycles.
Global economic inflation, which drove higher claims costs starting in 2022.

Today, rates are flattening as is expected in a cyclical market, though this period of softening would have been expected sooner, based on when the last phase of hardening began. Increased capacity and unconstrained capital in the market are contributing factors.

These shifts have come largely from existing market participants that have increased capital from retained earnings through this very profitable period for the market, though new entrants also play a role. The result has been intensifying competition during the last few years. Further, most multiline players reduced their casualty exposures in recent years, as that line of business grew more challenging. But these moves made many portfolios more sensitive to down cycles.

Overall, underlying underwriting results have been strong this year, despite large losses from Hurricanes Helene and Milton and Storm Boris. Several aviation events, including the Jeju and Air India crashes, will be a further drag on results. Pricing power in previous years means the specialty market will remain profitable for the near term, though this year is trending toward losses of more than $100 billion.

Mixed signals: shifting risks and new demand

During the last 24 months, some lines of business (e.g., directors and officers, cyber) have shown signs of softening. In aggregate, market rates flattened in 2024, net of long-run inflation. Despite this, nearly all products remain rate adequate.

Prior-year reserve developments continue to present a risk to writers of casualty coverage in the US, particularly on the reinsurance side, with social inflation a key driver, increasingly exacerbated by third-party litigation funding. Given its complexity and potential for volatility, the US casualty market is the biggest concern of large commercial, specialty and reinsurance executives around the world. There are positive demand signals, too. Macroeconomic forces are pushing some smaller and mid-sized businesses out of the general insurance market and into specialty lines. Proliferating risks also contribute to premium growth. The need for more cyber and AI coverage is likely to continue this trend for some time to come.

Managing expenses as premium growth stalls

Up to the end of 2023, the specialty market had seen its cost base rise year over year (YoY), largely due to revenue gains being prioritized over cost concerns. Between 2022 and 2023, cost increases outstripped premium growth for the first time. We expect 2024 results to tell a similar story. See figure 2.

Certainly, the industry has faced these challenges before. But industry veterans will be familiar with the feeling that the results of cost savings initiatives never show up in company financials, and that cost transformation is never sustained for very long. That reality means some carriers will be looking for tangible returns (both productivity gains and cost reductions) on big investments in automation.

The key is to identify those areas where expenses can be cut without damaging prospects for future growth and innovation. For instance, digitizing underwriting workflows not only reduces costs but simplifies processes in ways that can enhance relationships with brokers. It also frees underwriters to spend more time working with brokers and insureds or contributing to new product development.

Figure 2:

Market trend: FY20-23 cost and premium movement