What’s Happening and What Lies Ahead for P/C Insurance Pricing: Moody’s

October 30, 2018

The current pricing environment for property/casualty insurers is “modestly positive,” with commercial and personal auto rates rising by mid-to-high single digits, homeowners and commercial property rates rising by low-to-mid-single digits, and commercial casualty rates showing smaller changes, according to a Moody’s Investors Service rate change and trend survey of insurers it rates.

“Through 2019, we expect rate increases to exceed loss cost trends in auto lines, to roughly match loss cost trends in property lines and to lag slightly behind loss cost trends in commercial casualty lines,” Moody’s analysts say in the survey report.

Moody’s says personal auto rate increases of 7.0 percent in 2016, 7.5 percent in 2017 and a targeted 6.5 percent for 2018 should decline toward the low-to-mid-single digits, given the improving combined ratios.

Moody’s sees 2018 catastrophes including Hurricanes Florence and Michael extending the moderate upward pressure on property rates, especially in areas that suffered the most losses.

Here is more from the Moody’s insurer survey and analysis:

Personal Auto
Personal auto insurers’ rate increases of about 6.5 percent in 2018, after 7.5 percent in 2017, should support continued improvement in underwriting results. Moody’s expects these rate increases to slow as auto loss frequencies and combined ratios decline toward 100 in 2018-2019. Underwriting results deteriorated in 2015-16 due to more miles driven, more distracted drivers, and higher repair costs for vehicles with sensors and cameras. Insurers expect loss frequency trends to decline over the next few years thanks to collision avoidance technologies. Moody’s sees large national personal auto insurers continuing to gain market share at the expense of smaller regional companies with large, low-cost direct writers continuing to grow the fastest.

Homeowners insurers, which sought overall rate increases of 4.5 percent in 2018, expect rates to keep rising by low-to-mid-single digits to keep up with rising costs for construction labor and materials. Moody’s believes the 2018 catastrophes will keep the upward pressure on homeowners and other property rates. At the same time, abundant capital will keep a lid on overall rate increases.

Commercial Property
Given catastrophes and rising construction costs, watch for rates to continue upward on a moderate pace. Commercial property insurers sought overall rate increases of about 4.0 percent in 2018, an improvement from overall declines in in 2015-16 and flat pricing in 2017. Moody’s expects insurers to continue boosting rates by low single digits. While the 2018 catastrophes will keep the upward pressure on loss costs and rates, the P/C market has “ample capital to absorb the latest events and limit the overall rate increases,” says the report.

Commercial Auto
Despite significant rate increases since 2012, commercial auto remains one of the worst performing P/C insurance lines, although there has been gradual improvement, according to Moody’s. Rate increases of about 9.5 percent in 2018, following increases of 7.0 percent in 2017, will help reduce combined ratios from recent highs to about 105-106 in 2019. Insurers see commercial auto loss costs rising by 4 to 5 percent in 2018-19, reflecting increased miles driven, higher attorney involvement in claims, a jump in large claims (over $10 million) and a tight labor market with transportation firms hiring inexperienced drivers. “We believe the rising loss costs have led to an overall reserve deficiency for the commercial auto line,” Moody’s says.

Workers’ Compensation
Moody’s surveyed insurers expected workers’ compensation rates to fall by 2.0 percent in 2018 after more gradual declines in 2015-17. Moody’s expects the lower rates will cause accident year combined ratios to deteriorate from about 98 in 2017 to 101 in 2019. As the tight labor market leads to higher wages, payroll-based premium increases will likely outstrip indemnity cost increases. Insurers expect the medical cost trend to remain in the mid-single digits. Moody’s noted that for the second quarter The Hartford reported higher loss frequency for the first time in years, citing employers hiring inexperienced workers. But the overall loss cost trend is expected to remain low. Moody’s says insurers have been cautious about growing their workers’ compensation books given the long duration of loss and LAE reserves, low investment yields, and uncertainty regarding medical costs. Reflecting this caution, one large carrier, AIG, has reduced its U.S. workers’ compensation market presence from third largest in 2014 to ninth largest in 2017. Moody’s says caution among major players and AIG’s actions “have helped limit the price competition in this line.”

Commercial General Liability
Moody’s surveyed insurers have sought commercial general liability rate increases of about 2.5 percent in 2018 compared with 1.5 percent in 2017 and 1.0 percent in 2016. Moody’s expects combined ratios to deteriorate from about 101 in 2017 to 103 in 2019 as rising loss costs outpace the rate increases. Moody’s warns of higher non-products liability (slip and fall) claims among smaller insurers that serve middle market businesses, increased lawyer involvement in claims and adverse auto liability trends within commercial umbrella policies. The ratings agency adds that CGL writers are hurt by low investment yields and “aggressive litigation against insured parties or expanded interpretations of insurance coverage.”

Professional/Specialty Liability
Moody’s surveyed insurers have sought professional/specialty liability rate increases of about 1.5 percent in 2018 after slight declines in 2016-17. Yet Moody’s projects that combined ratios will deteriorate from about 102 in 2017 to 104 in 2019, partly because of rising costs of directors & officers and errors & omissions claims.

Commercial Multiple Peril
Moody’s surveyed insurers have sought rate increases of about 3.0 percent for the commercial multiple peril line in 2018, up from 2.0 percent in 2017 and 1.0 percent in 2016. Commercial multiple peril is split about 63%/37% between property and liability coverages. Catastrophe losses pushed the combined ratio up to about 107 in 2017 after four years in the mid-to-high 90s. Insurers expect the non-catastrophe loss ratio trend to remain slightly below the long-term average of 1.3 percent. Moody’s said insurers indicated “some increase in risk appetite for this line” for 2018-19. Meanwhile, increased attorney involvement in claims as well as rising construction labor costs pose potential challenges.

Topics Carriers Catastrophe Auto Profit Loss Workers' Compensation Personal Auto Property Property Casualty Homeowners

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