Current stability and underwriting profits are giving way to growing loss trends, investment headwinds and deteriorating profits. Still, that will not be enough to harden insurance markets in 2017, according to Jim Auden, Managing Director & Head of U.S. Property & Casualty at Fitch Ratings
The overall industry is “pretty stable” right now, as is Fitch’s ratings outlook. That stability is due largely to the industry’s capital strength and balance sheet quality. The industry has had good performance on profit over the last three years (2012-2015) with underwriting combined ratios below 100. This year, however, Mr. Auden says Fitch expects the industry to be at or near breakeven. Fundamental are deteriorating, but he doesn’t expect large underwriting losses yet.
Both personal and commercial auto insurance markets are struggling due to frequency and severity of claims. Mr. Auden points to more drivers on the road, distracted driving and new, more expensive technologies in cars as reason for higher losses. Commercial auto is experiencing higher litigation costs, which is driving rates up.
On the positive side, workers compensation had a good underwriting profit last year, and should do reasonably well in 2016, according to Mr. Auden. Looking ahead, however, pricing is deteriorating, and medical costs and inflation could affect claims in the future.
In property casualty insurance markets, Mr. Auden sees several headwinds, including on the underwriting and investment side. Pricing is deteriorating in most sectors due to excess capital and competition. Favorable reserve development is slowing down. Low interest rates are reducing portfolio yields and investment income is dropping.
Mr. Auden sees opportunities for underwriters in areas such as cyber risk and supply chain risk. In Fitch’s outlook for the future, Mr. Auden sees premiums softening in most sectors driving further profit deterioration. Fitch believes the industry will go from an underwriting breakeven in 2016 to a slight underwriting loss in 2017, and a return on surplus going from 6-6.5 percent in 2016 to around 5 percent in 2017. That said, Mr. Auden does not believe these trends will cause a shift in pricing or a hardening market.
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