Property/casualty insurers could be sliding into trouble in the second half of 2016. Blame a number of factors, including higher catastrophe losses, negative results in private passenger auto and declining bond yields, a division of Standard & Poor’s said in a new report.
With all of these factors in play, S&P Global Market intelligence predicts the industry’s combined ratio could tick up to 99.5, the highest it has been since 2012.
“Profit margins are project to be much narrower than they have been in the last few years, in the absence of any potential market-changing events,” said study co-authors Tim Zawacki and Terry Leone in prepared remarks.
S&P said problems could come in the wake of declining Treasury yields after the U.K.’s Brexit vote in June. This trend underscores “challenges the industry faces to earn reliable, low-risk investment income, putting additional pressure on underwriting discipline,” the report noted.
Beyond that, however, S&P said it expects large hikes in insured catastrophe losses during the 2016 first half will hurt down the line. The report said this will harm loss ratios in a number of business lines that “have produced historically favorable results during the past three years.”
The report analyzed financials for nearly 2,700 individual, U.S.-domiciled property/casualty entities that filed NAIC statements. It tracked performance over 10 years, through 2015, and illustrates historical and projected pre-tax returns on equity by business line.
Among the report’s other findings:
- Private-passenger auto insurance results, historically unfavorable already, will worsen again in 2016. S&P said this will come from more miles driven as gas prices remain low. Rate increases will help alleviate this, but the report said they won’t happen right away.
- In 2015, private auto lines produced 34.4 percent of the industry’s direct premiums.
- The absence of favorable reserve development, broad access to reinsurance, and seasons with few hurricanes could be another hurdle for the P/C industry to overcome in 2016 and after.
Source: S&P Global Market Intelligence