This year is set to be a tough one for property and casualty insurers, according to a new report published by S&P Global Market Intelligence.
The firm’s 2016
“US P&C Insurance Market Report” points to continued underwriting profit erosion as elevated losses, unfavorable results in auto and declining bond yields reduce overall performance in the sector.
S&P examined nearly 2,700 property and casualty companies for the report, using filings from the National Association of Insurance Commissioners over a 10-year period ending in 2015. Researchers looked at growth rates, losses and expenses by line of business to project future performance.
Total return on equity is projected to decline two percentage points this year, while combined ratio is expected to increase 99.5% - the highest level since 2012.
The personal lines segment – particularly auto insurance – is projected to suffer the most. Highly unfavorable results in the private-passenger auto business are projected to further deteriorate as low gas prices put more Americans on the road. As the private auto line accounts for 34.4% of the industry’s premiums, based on 2015 filings, the recent downturn has played a significant role in declining underwriting profitability.
S&P suggests the sector will improve as broad-based rate increases fully take hold, though it will take some time.
Brexit also continues to be an issue, as declining Treasury yields reinforces the challenges the insurance industry faces to earn consistent, low-risk investment income. That puts additional pressure on underwriting discipline, S&P said.
These factors will continue to shape the underwriting environment for some time, suggested report authors Tim Zawacki, senior editor and Terry Leone, manager of insurance research at S&P Global Market Intelligence.
“Profit margins are projected to be much narrower than they have been in the last few years, unless something dramatic happens,” the authors said.
“While insurers have wisely accounted for the fact that they haven’t been able to depend on investment gains to subsidize underwriting losses, they still need to practice restraint as they seek growth.”
Looking ahead, some tailwinds in the industry could counteract poor performance, including favorable reserve development, broad access to reinsurance capacity and a series of comparatively quiet hurricane seasons.
“But none of those elements will continue in perpetuity and the absence of any one of them could create additional hurdles for the profitability perspective in 2016 and beyond,” S&P concluded.
Related stories:
A 1-in-200-year hurricane could cost insurers $150 billion
Insurance companies face financial block in Europe
