Hardening rates in insurance and reinsurance are a trend that is expected to continue, analysts ave been told.

Making clear he supports that view – and that development – is Marc Grandisson, executive vice-president, chief financial officer & treasurer of Arch Capital Group Ltd.

Arch is a Bermuda based global leader in the provision of speciality insurance, reinsurance and mortgage insurance solutions on a worldwide basis.

Quizzed about the insurance pricing environment by an analyst on a recent earnings call, he said: “I think there's a recognition that the prices need to go up.”

He also said: "The underwriting community is recognising that more needs to be done, and you can see this evidenced in the discussion that they have with brokers. So we're very secure. I think there's going to be quite a bit more runway to this pricing improvement.”

When asked to compare and contrast the primary side with what was happening broadly in reinsurance, he noted there were indicators of a hardening market.

He said: “There's a lot more activity, more price pick-up on the insurance side."

Mr Grandisson said: “I think that if you're on a quota share basis, you're participating alongside your clients in terms of rate increases. So whatever rate increase I would have included in my remarks on the insurance, you could ascribe to the quota share reinsurance participation.

“On the excess of loss, it tends to always lag a little bit behind. There's some benefit from the underlying rate because the excess of loss pricing typically is a percentage of the underlying portfolio. So to the extent that some rates increased at the primary level, the excess of loss would get presumably a bigger percentage.

“But I think that it would be safe to say that the softer markets probably gave a little bit less adequacy or probably more of a need for price pick-up in the excess of loss, in general.

“And we're probably expecting this to start to happen soon. I think there will be some recognition that is sort of a second derivative typically of a hardening market.”

Arch has just announced second quarter net income available to common shareholders of $663.8 million, or $1.63 per share, a 21.2 per cent annualised return on average common equity, compared to $288.4 million, or $0.71 per share, for the 2020 second quarter.

After-tax operating income available to Arch common shareholders of $407.2 million, or $1.00 per share, a 13.0 per cent annualised return on average common equity, compared to $16.6 million, or $0.04 per share, for the 2020 second quarter.

Combined ratio excluding catastrophic activity and prior year development of 80.7 per cent, compared to 89.7 per cent for the 2020 second quarter.

In the insurance segment, net written premium grew 43.3 per cent over the 2020 comparative quarter one year ago, and there was strong growth of 63.6 per cent in net written premiums for reinsurance operations on a year-over-year basis.

Mr Grandisson remarked at the firm’s outstanding underwriting performance.

He said: “Our P&C insurance results demonstrate significant improvement in underwriting performance. Better market conditions allowed our teams to expand their overall positioning and grow net written premiums substantially over the same quarter last year.

“We are now in the sixth consecutive quarter of rate increases at plus 10 per cent this quarter, comfortably in excess of loss cost trend estimates. The higher level of premium earned from the post 2019 policy years is a primary driver of our improving underlying accident year combined ratio.

“About two thirds of the combined ratio improvement was due to lower loss ratios attributable to rate increases and underwriting actions we have taken over the past several years. The balance of the improvement was driven by a lower expense ratio. Production increased across most lines of business and geography areas as pricing improvements spread.

“While rate increases have tapered off from previous highs in some lines, we're seeing increases in lines that had been immune to meaningful change. And in lines where price increases have eased, we're still getting rate on rate increases on an improving margins.

“We estimate that approximately 30 per cent of our insurance premium growth reflects rate increases. About 15 per cent is from higher net retention level, and the remaining growth comes from new business and exposure growth with existing clients.

“Both our international and US insurance platforms continue to excel in the current market with substantial growth in professional lines, programs, property and travel and A&H writings.

“Our reinsurance group also had a quarter of strong growth while producing strong underwriting results. A large portion of this growth results from our ability to leverage our expertise and historical experience as a writer of quota share business.”