Fitch: Auto Underwriting Continues to Be Unprofitable

October 10, 2002

Auto insurance financial results will improve in 2002 and 2003, but these gains will be insufficient to return the industry to underwriting profitability, according to a report by Fitch Ratings.

Based on the market’s very poor underwriting results in 2001, Fitch does not believe the estimated increase in auto insurance premiums will be sufficient to return the industry to underwriting profitability.

“It is questionable whether the broader auto insurance market will reach a position of strong underwriting profitability in the next few years due largely to the business’ highly competitive nature and uncertainty due to inherent regulatory and legal factors,” Don Thorpe, Director, Fitch Ratings, said. “The market has improved to a degree that organizations with an appropriate geographic mix, and strong risk selection and pricing expertise can report good underwriting results in the current environment.”

The new report charts a severe decline in profitability that began in 2000 and continued into 2001.

The industry was hurt when previously favorable trends in loss severity reversed at the same time that major participants were defending their shrinking market share through aggressive price competition. Based on this performance, insurers have shifted their focus from maintaining market share to improving profitability and have increased premium rates notably in each of the last two years. However, these price increases at least partially, have been offset by increased loss severity and declining investment income.

“For companies weighted more towards the auto insurance line, factors that are likely to influence ratings going forward are underwriting results that are significantly better or worse than peers, and an ability to maintain or improve capital adequacy levels to keep up with revenue growth,” Thorpe remarked.

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