Property/casualty insurance markets are hardening and likely will continue to do so for a year or more, according to the “Property & Casualty Insurance CFO Survey” by Towers Watson, a global professional services company.

The percentage of CFOs who characterized the property market as “hardening, hard or at the top of the cycle,” increased by nearly 30-percentage points compared to two years ago, reaching 75 percent. The percentage of CFOs who characterized the casualty market as “hardening, hard or at the top of the cycle,” increased by 52-percentage points, compared to the previous survey, to 65 percent. According to 15 percent, the property market is softening, and 10 percent said the casualty market is softening. Most respondents, 51 percent for property and 52 percent for casualty, said the markets would continue hardening for the next one to two years.

“Insurers’ perceptions of the market have changed considerably, from a glimmer of hope for a turn in the insurance cycle, to the solidifying of firmer rates we’re experiencing today,” said Bruce Fell, a managing director in Towers Watson’s Risk Consulting and Software business. “The impact of the softer market the past several years, combined with low interest rates, has hurt insurers’ profitability. The state of today’s market should give insurers some breathing room and an opportunity to increase their bottom-line.”

Virtually all of those surveyed, 98 percent, said reserve redundancies still exist and 81 percent expect those redundancies to continue for a year or more; 42 percent said the redundancies will last one-to-two years and 25 percent said they expect them to last two to three years.

“We believe the current hard market is very different from the hard markets of the past,” Fell said. “Rather than being a reaction to poor pricing and severely deficient reserves – which cut deep into the industry’s financials and take years to reverse – the current market is characterized by pricing reflective of low investment yields and a tendency towards rational use of capital, and exists in spite of the reserve redundancies suggested by the results of our survey. Better investment yields coupled with the perception of relatively healthy financials may eventually lead to eroding pricing discipline. Further, the recent influx of alternative capital into the catastrophe reinsurance market could place downward pressure on reinsurance rates.”

Interest rates were the No. 1 economic and market environment concern for 81 percent, followed by natural catastrophes, 44 percent, and inadequate rate levels, 34 percent. In response, 46 percent said they are realigning investment portfolios, and 37 percent are expanding into new products or markets.

Investment returns were the biggest challenge to growth, profit and risk objectives, according to 93 percent, followed by economic growth, 51 percent, and competitive environment, 49 percent; 45 percent said they are not well prepared to respond to these challenges.

Ranking internal challenges, 36 percent said human capital was their No. 1 challenge, followed by data availability, 31 percent, regulatory restrictions, 25 percent, and technology limitations, 25 percent.

The greatest expense and cost management challenge was technology, according to 54 percent, followed by regulatory compliance, 33 percent, operations, 31 percent, and overhead, 28 percent.

“The turn of the cycle frees up insurers. They should use the opportunity to focus on issues, such as developing cost-efficient technology solutions, that can make them more competitive in the long run and offer them some cushion when the cycle starts to soften again,” Fell said.

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