Some, but not all, experts see an improving U.S. economy in 2016 helping to boost the property/casualty (P/C) insurance sector. Some of these prognosticators are more optimistic than others. But most also anticipate continued low interest rates, downward pricing pressures, additional merger/acquisition activity, and disruption from tech-savvy new entries and changing buyer behaviors. Their overall outlooks for the industry for 2016 are colored by how much weight they give all of the various and sometimes competing internal and external forces. Here are how experts at six insurance and consulting firms view the upcoming year.
The global economy is expected to strengthen moderately next year, supporting insurance premium growth in most regions, according to Swiss Re’s latest global insurance review 2015 and outlook for 2016/17. Demand for non-life insurance is expected to grow, led by an 8 percent to 9 percent annual gain in the emerging markets in 2016 and 2017. Global life premiums are forecast to rise by about 4 percent in each of the next two years, led by the emerging markets.
The U.S. and the UK economies are currently growing by close to 2.5 percent, and real gross domestic product (GDP) growth in Japan and the Euro area are a more subdued 0.7 percent and 1.5 percent, respectively. The four economies are all expected to see slightly better growth in 2016, says Swiss Re, and emerging markets will grow by about five percent in each of the next two years, an improvement on the current four percent pace.
Swiss Re acknowledges that the global economy faces three main headwinds: slower growth in China, lower commodity prices and a rate increase by the Federal Reserve. But the insurer says that while these pose a risk to the baseline forecast, they are unlikely to derail the improving growth momentum.
“Global economic growth is a good sign for insurers,” said Kurt Karl, Swiss Re’s chief economist. “This is especially so in the emerging markets, where urbanization and growing wealth will support overall sector growth. We’ve said for some years now that emerging markets are the growth engines for the insurance industry – and this is expected to continue for at least several years more.”
Demand for primary non-life insurance should increase in the next two years: 3 percent in 2016 and 3.2 percent in 2017, up from 2.5 percent this year. Growth in advanced markets is expected to slow slightly due to the generally softening prices and only modest improvement in economic growth. The emerging markets will be the main drivers in non-life, with premiums up an estimated 7.9 percent and 8.7 percent in 2016 and 2017, respectively, after a 5.6 percent gain in 2015. Premium growth is expected to be strongest in emerging Asia (12 percent annually), and a recovery is expected in Central and Eastern Europe after contraction in 2014 and 2015.
Despite the challenging pricing environment, underwriting profits in primary non-life insurance have been sustained by low natural catastrophe losses and a continuation of reserve releases from past years. The non-life reinsurance sector underwriting result has likewise been strong so far this year, also based on low natural catastrophe losses. However, Swiss Re notes, with falling prices, profit margins have eroded over the past two years. Property catastrophe reinsurance rates are currently close to bottoming out and the rate softening in most lines is expected to moderate or come to a standstill. In casualty and specialty, Swiss Re sees significant differences in pricing developments by market and line of business.
While the global life and property/casualty (P/C) insurance industries both have stable outlooks for 2016, according to Moody’s Investors Service, the outlook for the global reinsurance industry is negative, reflecting excess capacity and shrinking demand. In P/C insurance, although global growth will be modest, the rating agency expects strong growth from emerging markets, despite economic headwinds. In life insurance, profitability will be supported by an intensifying shift in product mix, offset by continued low interest rates.
Simon Harris, Moody’s managing director, said he expects that P/C premiums will grow in line with economic growth in advanced economies, and faster in emerging economies based on rising penetration rates, “even where economic growth is slowing.”
Moody’s said it expects that the global economy will continue to recover slowly, despite the slowdown in China, supporting insurance sales.
“For P/C insurers, a key sector strength remains the mandatory nature of major lines such as auto, home and commercial property,” said Harris.
Moody’s notes that P/C insurers generally maintain sound balance sheets with high-quality investments, adequate reserves and good capitalization, contributing to the stable outlook for the sector. However, Moody’s sees key challenges for the P/C sector as being natural and man-made catastrophes, coupled with pricing/reserving for long-tail lines.
The reinsurance outlook isn’t so optimistic.
“An abundance of reinsurance capacity and decrease in demand from primary insurers has created sustained pressure on reinsurance pricing and erosion of terms and conditions,” said Harris. According to Moody’s, reserve releases and benign cat losses have obscured the full extent of deterioration in earnings. Although reinsurers are taking steps to reposition for the new reality, including M&A and innovation in new products and markets, this exposes them to execution risk which can in some cases be meaningful.
The insurance industry is undergoing considerable regulatory change, including Solvency II in Europe, C-ROSS in China and the G-SII framework for globally systemically important insurers, which Moody’s generally sees as credit positive, albeit with limited implications for the next 12-18 months.
The rating agency believes that mergers and acquisition activity in the insurance industry, which reached record levels in 2015, will likely continue, driven by the challenging economic environment and the need for scale, combined with regulatory change.
Commercial insurance rates will further soften while industry consolidation will present challenges to insurance buyers in 2016, predicts Willis Group Holdings.
Consolidation among some of the largest insurance carriers is altering the marketplace, which means that insurance buyers, while still enjoying a buyer’s market, will face new choices and the strong possibility that more consolidation and marketplace transformation lies ahead, according to Willis.
Meanwhile, primary casualty rates are falling in most lines for the first time in the current soft market. Property rates will continue to fall, according to Willis experts, though slightly less steeply.
Matt Keeping, chief brokerage officer, Willis North America, sees the wave of industry consolidation that has brought together some of the industry’s leading names in the past year as having a major effect.
“In the short run, consolidation shrinks the market. As two companies become one, the marketplace offers one less piece with which to solve the puzzle of an insurance program…But a smaller market with fewer, larger players also opens up the field to new comers that can focus on smaller, specialized niches in areas of potential growth. So consolidation often yields its opposite by thinning the competition and encouraging the emergence of new puzzle pieces,” Keeping said.
“What does this mean for the risk professional? It means the marketplace continues to evolve, which means that new options will need to be understood and investigated and old options given a fresh look. It could also mean that we should challenge insurance carriers to be bolder about the risks they take on.”
Despite the signs of some pricing stabilization in property catastrophe during the June/July 2015 renewals, hopeful forecasts for a “softening in the softening” in reinsurance pricing have proved elusive, according to Willis Re in its “1st View Report.”
“The January renewals have unfortunately confounded the hopes of commentators that the market was reaching a pricing floor,” said John Cavanagh, global CEO of Willis Re.
U.S. commercial insurance market segments, including directors and officers (D&O) liability insurance, are continuing to soften and are likely to stay on this path for the near-term even as several large competitors merge, Fitch Ratings says.
Premium rates in property lines have been declining for some time in response to a lack of large loss events. Fitch said it expects that competitive forces will likely drive prices lower in more casualty and liability lines, in part due to past underwriting success.
Among the considerable operating challenges U.S. property/casualty insurers face heading into 2016, few are more significant than declining investment yields, according to Fitch. Investment yields in insurers’ investments fell again in 2015 and will likely fall further in 2016 unless long-term rates meaningfully rise.
Fitch maintains a stable outlook on the U.S. P/C insurance sector in part due to strong capitalization from lighter-than-average catastrophe events. However, the industry’s revenue production is dogged by premium rate competition in most segments and limited revenue growth in a still-recovering economy. These factors, combined with weak investment yields, mean that P/C profits will be under pressure in 2016.
Declining interest rates have steadily eroded portfolio investment yields in high-quality, fixed-income securities for years. Lower investment yields mean there is greater pressure to produce underwriting profits to generate an adequate return on capital.
Fitch believes that the Federal Reserve’s recent increase of the Fed Funds target rate, and anticipation of further increases in 2016, may promote some stabilization of portfolio yields. However, the effect of rate hikes on credit fundamentals and the longer end of the yield curve is yet to be determined. It is also uncertain how new issue yields in the investment-grade corporate and municipal bond markets, favored by P/C insurers, will react to future Federal Reserve actions.
The persistently lower yields and unrealized losses on equities and alternative investments in third-quarter 2015, due to market volatility, have led to a sharp decline in year-to-date total investment returns. Within a group of 42 publicly held insurers that Fitch follows, the total return on investments declined to 2.3 percent for the nine months ending Sept. 30, 2015 versus 5.3 percent in the prior-year period.
Fitch believes P/C insurers’ total investment return is unlikely to meaningfully rebound in the near term as any upward interest rate movement will reduce values of fixed income holdings. Outsized equity returns that could offset the effect are not likely, given current market valuations and still mixed economic fundamentals, according to the rating agency’s experts.
For 2016, U.S. property/casualty insurers will face ongoing disruptive change from technology and an economy that doesn’t improve enough to significantly boost insurance sales, according to Ernst & Young (EY).
The consulting firm says digital technologies, including analytics and telematics, will continue to transform the industry and ridesharing and other elements of the sharing economy will force carriers to “rethink” their traditional insurance models.
EY says digital technology is eroding advantages of scale and empowering smaller carriers to compete for market share. EY sees the launch of Google Compare in 2015 as the start of a larger wave of insurance tech activity in 2016.
Unlike many other analysts, EY does not see economic growth in 2016 as sufficient to boost insurance. Although the U.S. is doing better than many countries, forecast growth of less than 2.5 percent for 2016 is unlikely to boost employment or wage growth significantly, according to EY.
Despite sluggish economic conditions, EY sees P/C insurers doing well next year due to favorable underwriting in commercial lines and rising personal lines premiums. Also, in terms of good news, the industry enters 2016 with a strengthened balance sheet and a strong base of invested assets from several years of solid reserve development and benign catastrophe experience, says EY.
The bad news for insurers in 2016 is that their return on investment is likely to continue to slip. Losses and expenses are growing faster than revenue. In personal automobile and workers’ compensation, rising frequency and severity are beginning to erode loss ratio performance.
Competition is putting downward pressure on pricing, particularly in the commercial property and liability lines. This is compounded by slowing growth in commercial exposures due to economic weakness.
Going forward, the sluggish economy, along with increased merger and regulatory activities, will allow “innovative firms” to capitalize on an industry in flux.
“Insurers that stay ahead of these shifts should reap substantial benefits, while laggards risk falling behind, or even out of the race,” the firm warns.
Despite rate reductions and low investment returns, commercial lines insurance is on track for positive underwriting gains in 2016, according to Wells Fargo Insurance’s forecast.
Favorable losses across most insurance lines and lack of multiple catastrophic property losses are driving this trend.
“2015 was another buyer’s market for both property and casualty commercial insurance and affiliated lines, with rate decreases from medium- to- high single digits to low double digits,” said Doug O’Brien, casualty and alternative risk practice leader. “Barring any catastrophic events, we expect similar trends will continue in 2016 for a majority of industries and coverage lines. Rate decreases are expected in the mid- to- high single digit range for most lines as new and existing capital is deployed into the property and casualty market.”
According to Wells Fargo, these are highlights of what to expect in the P/C insurance segment in 2016:
- Higher revenues, payrolls, and property values – With gross domestic product (GDP) growth expected to slow in 2016, expect to see higher revenues, payrolls, and property values upon which insurance premiums are based. This will also help to offset some of the premium lost by insurers through year-over- year rate reductions.
- Higher investment returns – Moderately rising interest rates will provide an environment in which higher investment returns are possible for insurers.
- More data analysis – Using data analysis to develop more sophisticated and accurate predictive patterns and loss trends continues to increase. Insurance companies, brokers, third-party administrators, and other vendors are utilizing first-party and third-party data as an underwriting tool, means of loss control and way to handle claims more timely and efficiently. However, it remains unclear whether the data used is interpreted objectively, the resulting conclusions are accurate, and recommendations are implemented appropriately.
- Continued mergers and acquisitions – Achieving profitable organic growth is becoming more difficult as mergers and acquisitions in the insurance and reinsurance market continues. This trend will continue to drive cost efficiencies, increase product line offerings, provide for a global geographic footprint, and increase market share.