U.S. Commercial Lines Insurance Poised for Decline

The U.S. property/casualty insurance commercial lines sector is poised for a decline in 2016 after a stellar three-year run, with cyclical pressures to blame, Fitch Ratings said in its latest market update.

It was a good run, at that. Fitch noted that the sector had a 94 combined ratio from 2013-2015. But the ratings agency said that slow premium growth for commercial lines will likely extend through 2016, with industry loss ratios and underwriting performance heading toward modest deterioration.

Competitive pressures and limited exposure growth are to blame, Fitch said, adding that more severe catastrophe losses could make results decline even more dramatically.

There is also the cyclical nature of the market, and the idea that property results drive performance of the overall sector. One thing to consider is that 2013-2015 was a period where catastrophe-related insured losses landed below historical norms. Fitch said that when this happens, the commercial market produces favorable results.

Fitch identified a number of market trends that point to a commercial insurance market decline. Among them:

• Workers compensation improved from 2011-2015, and the last year in that five-year cycle produced an underwriting profit. That’s good news for the largest commercial lines segment by premiums, but Fitch said that this may not continue, due to the line’s traditional “volatility and claims complexity.”
• Commercial automobile liability insurance continues to generate underwriting losses and adverse reserve development. Fitch noted that this comes from claims severity challenges. Expectations are that the segment will produce an underwriting loss in 2016, despite “meaningful price increases.” Commercial auto is the worst-performing major market segment, and it had a 109 combined ratio in 2015.
• Competitive pricing and soft market conditions are becoming a trend, due to underwriting profits and strong market underwriting capacity.

Source: Fitch Ratings