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The U.S. property/casualty insurance sector faces enough obstacles heading into 2017—everything from heavy competitive pricing to weaker profitability—that Fitch Ratings changed its fundamental sector outlook to negative from stable.

At the same time, Fitch said in its latest report that the rating outlook remains stable for the personal and commercial lines sectors, thanks to strong capital positions. With capital to withstand any near-term volatility expectations, most ratings of individual insurers are unlikely to change, the firm said, explaining the stable outlook on ratings.

(Editor’s Note: One of the report’s authors, James Auden, leader of the North American P/C Ratings team, has explained in the past that Fitch’s “sector outlooks” are performance-based outlooks or profit expectations, in contrast to the “rating outlooks,” which reflect expectations about financial strength rating upgrades and downgrades.)
“The P/C industry is at a point in the market underwriting cycle at which near-term conditions and profitability are likely to worsen further before any changes in collective underwriting and pricing behavior materializes,” Fitch said in its report. “Still, an extended period of mediocre returns remains more likely than a shift to operating losses,” supporting the shift to negative on the sector outlook.

In aggregate, Fitch predicts nearly $38.5 billion in net income for the U.S. P/C industry in 2017 versus $46.4 billion projected for 2016 and nearly $58.3 billion in 2015.

Expectations are that net written premium will surpass $551 billion for 2017 compared to a projected $535.4 billion in 2016 and $520.2 billion in 2015.

Fitch sees 2017 giving the sector a 101 combined ratio, up from a projected 99.6 for 2016 and 97.9 in 2015.

Trouble Spots: Continued Softening Market, Automobile Underwriting

One of the big issues leading to the declining sector outlook is the softening market. According to Fitch, the softening underwriting cycle is projected to be worse through 2017 due to rate deterioration in areas including commercial property and workers compensation. Falling premium rates are a problem, the report explains, because they contribute to slower revenue growth rates.

“Commercial property remains the softest individual segment,” according to the report. “Workers compensation and general liability rate declines are now more pronounced.”

The Fitch report, citing statistics from The Council of Insurance Agents & Brokers quarterly market survey, noted that rates have now declined for eight consecutive quarters, including a Q3 2016 drop of 2.3 percent.

Commercial auto “is the one segment with increasing rates due to recent sharp losses,” Fitch added.

Another point of contention: automobile underwriting itself. As Fitch explains, commercial and private passenger auto segments are in underwriting loss territory. The report refers to commercial auto as a chronic underperformer for the last five years “due to past price inadequacy and adverse claims experience.” But as reported elsewhere, personal auto underwriting losses grew in 2015 and saw little improvement in 2016 even with market pricing responses.

“Claims severity trends are unfavorable in this product as more sophisticated parts and components in vehicles add to repair costs following accidents,” Fitch said. Other factors include more driving due to low fuel prices and more accidents from driving while distracted by social media and electronic devices (factors that also hurt commercial auto).

Technological changes, higher insured catastrophe losses and declining investment income are other obstacles that will hit the market in 2017, Fitch said.

Strong Fundamentals Remain, in Part

Still, Fitch sees the industry’s capital strength remaining very strong and expects a fourth year of statutory underwriting gains in 2016. But combined ratios and profitability will worsen into 2017.

“The underwriting combined ratio is likely to rise in 2016 to more than 99 percent and anticipated further deterioration will promote a projected underwriting loss in 2017,” Fitch said.

With flat investment earnings expected along with weaker underwriting results, Fitch expects the industry statutory return on surplus will decline to 6.6 percent in 2016, down from 8.5 percent in 2015. It will drop further in 2017, Fitch said.

The full report is Fitch Ratings’ “2017 Outlook: U.S. Property/Casualty Insurance.”

Source: Fitch Ratings