With an industry overall combined ratio for 2019 hovering just below 100, and individual lines like long-tail liability moving 10 points over breakeven, the U.S. commercial lines market has “plenty of room for improvement,” Fitch Ratings reports.
But improvement isn’t coming soon, said James Auden, managing director and North American head of Non-Life Insurance Ratings at Fitch, during a June 17 webinar, summarizing some industrywide and by-line results for the full-year 2019 based on statutory financial results.
The industry tallied a 99.7 combined ratio across all commercial lines (except mortgage and financial guaranty). Fitch analysts had been anticipating a 2020 improvement to 97 or 98 prior to the COVID-19 pandemic and its economic ramifications. The benefits related to “improved underwriting conditions slightly outpaced concerns on loss trends and reserving weakness,” they said, explaining the pre-COVID forecast.
Now, they expect that a slowdown in earned revenue growth in the second half of this year, and incurred losses from COVID-19-related claims will offset any claims reduction tied to decreased economic activity. Additional losses that may accrue from recent public unrest and the ever-present potential for natural catastrophe losses mean the industry combined ratio result is more likely to surpass the 100 mark for the year 2020, they said during the webinar and in a published report.
“When we look at the underwriting performance for the year 2019, it really is on par with 2018 with a result barely under 100,” Auden said, citing a combined ratio of 99.7 for 2019 and 99.8 for 2018. “Not bad results but plenty of room for improvement in our view,” he said, noting that lower catastrophe losses put 2019’s combined ratio below 2018 and below a higher 103.9 level recorded in 2017.
Still, 2019 results were unfavorably impacted by deterioration in performance in a number of liability segments, he said, referring to litigation costs and to commentary from carrier executives about the impacts of social inflation driving up claims costs. He noted that litigation cost trends seem evident in loss reserve figures as well as overall underwriting results. “We think reserves are not as strong as they were at year-end 2018 , and when we look at reserve development in 2019, [it’s] still favorable but roughly half what we saw in 2018,” he said.
Across all commercial lines, the Fitch report notes that favorable prior-period reserve development amounted to $2.8 billion during calendar year 2019, representing 1.0 percent of commercial lines earned premiums. That compares to 2.8 percent in calendar year 2018.
Liability Takes a Turn
Reviewing some by-line results, a 110 combined ratio for other liability-occurrence wasn’t the worst result reported for 2019 but it stood out as the one with the most serious loss reserve deficiency by Fitch’s estimate, coming in at 5 percent of carried reserves. The 110 combined ratio was the highest other liability-occurrence combined ratio in a five-year period summarized in the report, up 5 points from 2018 and 7 points from 2015.
That 5-point jump in combined ratio from 2018 to 2019 for long-tail other liability was actually lower than 7-point jump for other liability lines written on a claims made basis, which includes lines like professional liability and D&O. But in the aggregate, other liability-claims made remained profitable last year, with a 98 combined ratio, a figure which Auden said surprised him given the headlines about litigation trends in D&O. Going forward, “strong pricing trends could bode well particularly in D&O,” he said.
Auden noted that medical professional liability, the smallest commercial lines segment, moved to the worst combined ratio among the commercial lines in 2019, with an 8-point jump to 112 from 104 a year earlier. Back in 2015, the line was profitable with a 99 combined ratio. “While pricing is going up [and] revenue is going up a bit, we don’t see a big turnaround in performance. More looks like it’s needed here before you get a turnaround,” Auden said, noting that while medical professional is the most strongly reserved of the commercial lines, favorable prior-year development has diminished over time—falling from 27.4 percent of earned premium in 2015 to 6.2 percent in 2019, according to figures presented in the report.
Turning to commercial auto, which actually had a better combined ratio than long-tail liability and medical professional in 2019, Auden noted that commercial auto is probably the most chronic underperformer in commercial lines. With a 109 combined ratio in 2019, up one point from 2018—the line has posted nine straight years of underwriting losses “despite years and years of favorable pricing actions.
Chronic Commercial Auto Trouble
“More underwriting action is needed to turn this segment around. And from a performance standpoint, reserves we still think are deficient,” he said, putting the deficiency in the 0-5 percent range of carried reserves. “We have just seen significant reserve development year over year including 9 points of adverse [prior-year] development in [calendar year] 2019 for commercial auto,” he said.
Commercial auto is also one of the lines that may be adversely impacted by the coronavirus pandemic, noted Analyst Gerald Glombicki during the webinar.
“While personal auto has seen dramatic drops in miles driven, many commercial fleets, particularly for consumer-related items have not [and] in some instances, [they] have seen significant increases,” he said, pointing to continued upward trajectories in online buying trends. (Glombicki also discussed business interruption, workers compensation, D&O and medical professional impacts from COVID-19 loss exposures.)
On the opposite end of the commercial lines spectrum, workers’ compensation remains the most profitable commercial line in the last five years—posting an 88 combined ratio in 2019, and a 92 average over last five years. With more than 15 points of favorable prior-year development coming through the industry financials in calendar-year 2019, “we think there’s still a very strong redundancy in those reserves,” Auden said, displaying a slide indicating an estimated redundancy exceeding 5 percent of workers’ comp carried reserves.
Unlike other lines, which are evidencing positive insurance pricing trends, however, workers’ comp remains the one line where prices are falling. “We do not think these very strong results are sustainable,” Auden said.
During a question-and-answer session of the webinar, a viewer asked: What will happen first—a commercial auto underwriting profit or a workers comp underwriting loss for the industry?
Auden predicted that a workers’ comp underwriting loss is on the horizon but he didn’t give a time frame. When you have success, competition erodes pricing and terms and conditions to move carriers away from that success, he said.
“When you look at commercial auto, it’s been bad for so long [with] 100-plus combined ratios [for] nine straight years. There’s been plenty of price increases over that period. It just seems like something more is needed—or some change in the claims environment, particularly for bodily injury, that [makes] things settle down somehow,” he said.
“I don’t have a lot of hope for commercial auto turning around. But workers comp has done very well and it’s the only line where prices are not going up today. So, you’ll see erosion in performance naturally there. And then there is volatility in claims there too, particularly on medical costs,” he said, predicting that at some point, medical costs will overtake the reduction in prices moving workers’ comp underwriting results into loss territory again.
‘Good, Bad and Ugly’
During the session, Auden put the pre-COVID status of each commercial lines of business into “good,” “bad,” and “ugly” buckets, describing comp, commercial property and claims-made liability underwriting results as “good,” commercial multiple peril and occurrence-based liability as “bad,” and commercial auto and medical professional as “ugly.”
Auden discussed pricing trends and Glombicki described pandemic impacts to give some indications of what lies ahead for each line of business.
Discussing workers’ comp insurers, for example, Glombicki said “coronavirus brings several challenges, including uncertainty of premium related to employment levels, claims from front-line workers and the presumption of coverage in several states enacting reforms.”
Auden noted that after taking a turn for the worse in 2019, long-tail liability is poised to bounce back from the 110 combined ratio because of very positive pricing trends.
Overall, Fitch analysts noted that commercial lines, which represent roughly 43 percent of industry written premiums, saw continued premium growth before the pandemic, with 6.6 percent growth in direct written premiums (about 3 percent for net written premiums). The numbers were driven by a still growing economy in 2019 and favorable pricing movement in a number of commercial lines, Auden said.
“Price hardening continues to accelerate across most lines in response to weaker performance and substantial recent changes in risk appetite for several large insurers,” Auden said, highlighted a figure from the Council of Insurance Agents & Brokers quarterly market pricing survey—a 9 percent average rate change in first-quarter 2020, which was the “highest rate of increase in first quarter since first-quarter 2003.”
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