A.M. Best Co. maintains a stable outlook for the personal lines segment in 2006 based on its favorable risk-adjusted capitalization and consistently strong operating profitability. Despite the impact from an unprecedented hurricane season in 2005, the segment is estimated to generate an underwriting profit for the third consecutive year.
With the private passenger automobile liability and physical damage lines accounting for more than 60 percent of net written premium for the composite, the personal lines segment’s strong profitability has benefited greatly from favorable frequency and severity trends. The utilization of enhanced pricing models by the majority of companies has also contributed to the segment’s outstanding underwriting profitability, despite a recent modest softening of rates and an increase in advertising expenditures.
Although significantly impacted by hurricane losses, the homeowners line of business’ combined ratio was only slightly greater than break-even. A disciplined underwriting approach focused on price adequacy, policy exclusions and increased deductibles were all contributing factors that limited the overall loss to a manageable level. Also a material amount of losses were ceded to third party reinsurance companies, lessening the overall impact on the segments’ underwriting performance.
A.M. Best will continue to take a rigorous approach in its evaluation of capitalization levels and risk management techniques. In response to increased frequency and severity of catastrophic events, more detailed catastrophe exposure information will be requested during the interactive rating process and through the supplemental rating questionnaire (SRQ).
In addition, the accuracy of the data provided to catastrophe modelers and the assumptions used to develop the modeled results will play an important role in the assessment of a company’s current and prospective risk-adjusted capital.
The stable outlook for 2006 contemplates that the favorable automobile frequency and severity trends will not dramatically deteriorate, while rates will only modestly soften.
Despite consideration for an increase in hurricane activity, as predicted by many meteorological experts, A.M. Best is projecting an underwriting profit for the homeowners’ line of business. Contributing to this return to profitability is an expectation that risk mitigation initiatives will continue to be refined in reaction to recent hurricane activity, as well as continuation of rate adequacy.
Lastly, the current outlook is based on observable trends and is dependent on the mindset of segment leaders not to aggressively reduce rates to gain market-share, particularly with regards to the automobile line.
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