The outlook for the U.S. property/casualty commercial insurance sector is stable but insurers will begin to feel the pressure from compressing margins, according to Moody’s Investors Service.
In a new report, Moody’s said its stable outlook for the sector is based on adequate rate levels across major casualty lines, good capital adequacy and improving risk management among U.S. P/C insurers.
The outlook is underpinned by Moody’s forecast for economic growth in the range of two percent to three percent, which the rating agency says would continue to drive demand for commercial insurance.
“We continue to see positive signs from P&C insurers including sound capitalization and enhanced risk selection and segmentation,” said Moody’s Vice President Bruce Ballentine. “However, the sector faces challenges from heightened price competition, potential natural and man-made catastrophes, and the low interest rate environment.”
Moody’s sees 2015 as a turning point for commercial casualty lines, with earned rate increases falling below loss ratio trends, resulting in slightly higher accident year combined ratios for the first time since 2011. For commercial casualty lines, Moody’s analysts expect the pricing trend to be flat to slightly negative in 2016. In contrast, commercial property rates are already negative and expected to be more negative in 2016, given the lack of catastrophes in recent years and the soft market for catastrophe reinsurance.
Moody’s said it expects loss reserves to be slightly redundant, with a shortfall in commercial auto given overall rate increases in recent years, moderate loss ratio trends, enhanced underwriting standards, and Moody’s estimate of a slight reserve redundancy from year-end 2014.
While low interest rates constrain commercial insurers’ profit margins, Moody’s analysts said they expect that insurers will maintain “solid capitalization and prudent controls” over their insurance and investment portfolios.
“The low yield on investments has been an earnings challenge for P&C insurers, but it has also promoted underwriting discipline,” said Ballentine.
Moody’s analysts said that the sector is more exposed to negative than positive developments, noting that weakened economic growth and prospects of double-digit rate declines could shift the outlook to negative.
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