U.S. property/casualty insurers will mark a third consecutive year of underwriting profits in 2015, a feat unmatched since the early 1970s. However, market sentiment has shifted unfavorably as heightened price competition and several other factors point toward underwriting results moving closer to breakeven levels in 2016. Additional operating challenges, including a declining investment contribution to earnings, will lead insurers’ statutory return on surplus to drift lower in the near term.

Executive Summary

While the U.S. P/C insurance industry enjoyed three straight years of underwriting profits, Fitch believes that the streak could end in 2016. Here, North American Sector Lead James Auden outlines factors that could drive the industry aggregate combined ratio down to breakeven. Weak top-line growth and investment prospects are added pressures that may fuel M&A and push overall returns to about 7 percent of surplus.

Underwriting Results Likely to Deteriorate

The P/C industry statutory combined ratio is projected at 97 in 2015, following a 97 result in 2014 and 96 in 2013. An extended period of firming premium rates across most market segments from approximately midyear 2011 to the latter portion of 2014 was a key contributor to this change in underwriting fortune.

Expansion of underwriting capacity from retained profits combined with limited new opportunities to deploy capital is promoting a shift toward the softening phase of the underwriting cycle. In commercial lines, The Council of Insurance Agents and Brokers “Commercial P/C Market Index Survey” indicates that renewal insurance premiums have fallen for four consecutive quarters and were down 3.1 percent in the third-quarter 2015 report. The reinsurance and primary commercial property lines experienced sharper declining rates for some time. Now, more segments are seeing flat and declining rates, including casualty lines such as workers compensation and general liability.

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