Leaders of the property/casualty insurance industry expect 2016 to be a profitable year much like 2015 but do not see any increase in profitability this year for most lines of insurance, and they do not expect the economy to stay about the same, according to an industry survey by the Insurance Information Institute at its annual Property/Casualty Insurance Joint Industry Forum in New York this week.
However, they do see one area of P/C insurance growth: cyber.
On the political front, 55 percent of respondents said they think there will be a Democrat in the White House.
Broken down by lines of insurance, this year 61 percent of P/C executives see no increase in profitability in personal auto, homeowners or commercial lines, while 68 percent see no improvement in the workers’ compensation line. Last year 44 percent said they did not expect an improvement in workers’ compensation in 2015.
According to III, about 80 executives participated in the survey.
Seventy-nine percent of P/C industry leaders believe the U.S. economic growth will remain the same in 2016. Sixteen percent believe the economy will accelerate.
“The U.S. economy appears to be growing slowly but steadily, which translates into more economic activity and the addition of capacity. Personal and commercial insurance will also grow as a result, assuming none of the many potential adverse economic shocks develop,” said Dr. Steven Weisbart, senior vice president and chief economist with the I.I.I. “As the economy inches closer to full employment, we may begin to see wage increases that outpace inflation for the first time in nearly a decade, primarily affecting the workers’ compensation line.”
Weisbart also said that the low-interest rate climate “has begun a return to normality, but is not expected to reach those levels until 2018.”
Seventy-six percent of executives said they see cyber insurance as a major growth leader for insurers in 2016. Cyber crime is exposing businesses – both in the U.S. and abroad – to greater levels of liability than ever before, which is why the market is far from saturated.
Fifty-three percent of executives believe premium growth will grow at the same rate in 2016, compared to 2015; only 29 percent of respondents believe it will grow faster; and 18 percent believe it will be slower. In terms of capacity, as measured by policyholders’ surplus, 61 percent of respondents expect it to increase; 21 percent believe it will remain flat; and 18 percent believe it will decrease.
As compared with 2015, 74 percent of respondents believe the combined ratio will be higher in 2016. The combined ratio is a percentage of each premium dollar a property/casualty insurer spends on claims and expenses. The combined ratio rose by 0.8 percentage points to 98 percent* in 2015 (estimated) from 97.2 percent in 2014. A combined ratio over 100 means that claims payments plus expenses exceeded insurance premiums.
“Combined ratios must be lower in today’s depressed investment environment to generate risk appropriate ROEs,” added Weisbart. “Lower catastrophes helped pull up ROEs in 2015,” he said.
M&A, Interest Rates, Regulation
One way to lower expenses is by consolidation; 55 percent of respondents expect a continued increase in M&A activity among insurers and reinsurers in 2016.
On the investment side, 47 percent of industry leaders expect a lower year in the equity markets in 2016 (but for the industry as a whole, equities constitute only about 15 to 20 percent of invested assets). About 70 percent of invested assets are in bonds.
Industry leaders were asked whether they expect interest rates to rise, fall or remain flat in 2015. Sixty-eight percent think they will rise and 32 percent expect interest rates to remain flat.
Many executives in the property/casualty industry believe there will be a stricter regulatory environment in the year ahead. Eighty-seven percent believe the federal government is interested in further expanding its regulatory oversight of insurers.
Source: Insurance Information Institute