After a profitable 2019, the U.S. personal lines insurance sector is positioned to see underwriting profits in 2020 even with considerable economic uncertainty from the coronavirus pandemic, according to a report from Fitch Ratings.
The ongoing pandemic is “substantially affecting” the insurance industry’s underwriting and investment outlooks, Fitch says. In the short-term, personal lines insurers are likely to see a boost in profits from reduced auto claims activity as a result of the slowdown in economic activity and policyholders cutting back on their driving.
Many auto insurers returned a portion of premiums to policyholders, and some are continuing to do so, as a way to reflect the reduced likelihood of claims as people drive less. Many policyholders received back 15% to 20% on two to three months of premium. The total returned has been estimated at more than $10 billion. According to California officials, that state’s driver have received $1.21 billion in savings for March, April and May.
The Consumer Federation of America and the Center for Economic Justice have argued insurers should have returned more than they have and they have repeatedly called on state insurance commissioners to require premium refunds. “Market forces alone cannot and will not protect consumers from excessive premiums and urgent regulatory action is needed to ensure fair treatment of consumers and insurer compliance with statutory rate standards,” J. Robert Hunter, CFA’s director of insurance, wrote in March. Most states have not mandated refunds.
The consumer groups have pointed to Progressive Insurance, which reported an 83% increase in net income for the second quarter of 2020. The consumer advocates call this haul a “coronavirus windfall,” and proof that in returning 20% of premium to its policyholders the company “did not return nearly enough premium to customers as accidents and claims diminished due to stay-at-home orders.”
Fitch acknowledges that the premium returns may have fallen short of what they could be but thinks insurers may pay a price.
“Recent premium returns and rebate actions do not fully offset recent lower claims experience, but will foster price competition that may lead to poorer performance when economic and claims activity normalizes,” said James Auden, managing director, Fitch Ratings.
Fitch maintains a stable rating outlook on the U.S. property/casualty (P/C) insurance industry, including the personal lines sector, even though in March the near-term fundamental sector outlook was changed to negative due to uncertainty in underwriting and investment performance tied to the pandemic.
Personal lines insurance is the largest major segment of the U.S. P/C insurance market, with approximately $344 billion (54% of total industry premiums) in 2019 written premiums. Personal auto insurance premiums represent more than 2.7x homeowners insurance volume for the industry. Personal lines net written premiums growth slowed to 3% in 2019, from an average rate of 6% from 2015-2018 as auto premium growth diminished.
According to Fitch, personal lines posted a 98.7 combined ratio in 2019, less than 1 percent better than the 99.4 combined ratio produced the year before. For personal auto, at least, Fitch expects the combined ratio to improve by a few points, which would drive the overall results for the broader personal lines sector.
Personal lines net written premiums grew 3% in 2019, down from an average rate of 6% from 2015-2018 as auto premium growth diminished. This year personal lines will likely come up short in terms of growth but one other trend will persist.
“Auto insurers’ premium growth in 2020 will greatly diverge from historic trends given premium refund and rebate actions in response to exposure changes from the pandemic,” added Auden. “But the long-term shift in market share towards large publicly held underwriters with direct distribution and sophisticated pricing capabilities will not be affected.”
Fitch projects GEICO will move to a virtual tie for No. 1 market share with perennial market leader State Farm by YE 2021, and Progressive is positioned to move to the No. 2 market position by 2023.
The Fitch Ratings report is “U.S. Personal Lines Market Update.”
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