Fitch Expecting P/C Commercial Insurance Business to Deteriorate

May 19, 2016

Underwriting performance for the commercial lines sector of the U.S. property/casualty (P/C) insurance industry is likely to deteriorate in 2016, according to a new report from Fitch Ratings. The expected decline would come on the heels of three straight years of underwriting profit for the industry, with a combined ratio of approximately 94 in each of the last three years (2013-2015).

“Catastrophe losses below historical norms contributed to strong 2015 commercial market results; however, results will likely stumble in 2016 as industry competition heats up and premium rates are declining in a growing number of product segments,” said James Auden, managing director, Fitch.

Renewal rates are flat or declining for most commercial market segments following a hardened market from 2011-2014. The price competition comes from underwriting success and market capacity expansion from earnings accumulation. As price competition intensifies however, this will likely be a drag on premium growth, according to Fitch. Commercial lines written premium volume grew by only 1.8 percent in 2015.

Workers compensation, the largest commercial lines segment, has steadily improved over the last five years to a significant underwriting profit in 2015; however, Fitch views these results as a cyclical peak with future results deteriorating due to competitive pressure and the inherent volatility in this business.

According to a National Council of Compensation Insurance (NCCI) report on 2015 results, the workers compensation calendar year 2015 combined ratio for private carriers came in at 94, a six-point improvement over the 2014 combined ratio. NCCI said total market net written premium for workers’ compensation increased by almost three percent to $45.5 billion, driven primarily by an increase in payroll. However, workers compensation industry faces challenges ahead including rising prescription drug costs and the extended low-interest-rate environment.

According to Fitch, commercial automobile liability insurance continues as a weak performer, generating a large 2015 underwriting loss and adverse loss reserve development due to claims severity issues. While commercial auto business continues to have meaningful premium rate increases, Fitch expects the segment to generate another underwriting loss in 2016.

Favorable loss reserve development from prior underwriting periods declined in 2015 representing two percent of calendar year commercial lines earned premium. American International Group Inc.’s (AIG) large fourth quarter reserve charge significantly affected this result.

“Commercial property results will greatly influence overall commercial market results for 2016, a reversion toward more severe catastrophe losses would lead to a sharper decline in 2016 performance,” added Auden.

Earlier this year, in January, A.M. Best said it was continuing its negative outlook for on the commercial lines segment, despite relatively solid aggregate results over the past several years. The negative outlook indicates A.M. Best’s expectation of more downgrades than upgrades in the coming year.

In reviewing actual results for 2015, A.M. Best found that the commercial lines segment produced a slightly higher level of pre-tax operating income in 2015, driven by increases in net investment income and other income. While underwriting income declined compared with 2014, the segment’s underwriting performance remained favorable. The segment’s underwriting results were hurt by expenses, with both loss adjustment and underwriting expenses increasing relative to premium. Incurred losses declined on both a relative and absolute basis, driving the loss ratio down to 53.0 from 54.2.

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