Fitch revises US P/C sector to negative; 2017 combined ratio to top 100%
Further declines in profitability and earnings driven by competitive market conditions has prompted rating agency Fitch to revise its sector outlook for the US property/casualty insurance sector to negative from stable.
In the Fitch Ratings' 2017 Outlook report for US Property/Casualty Insurance, Fitch said that the P/C industry is likely to generate a statutory combined ratio below 100 percent for the fourth consecutive year in 2016.
However, it stressed that underwriting profits will prove very modest as the combined ratio forecast is over 99 percent. Fitch is projecting an underwriting loss in 2017 with the combined ratio reaching 101 percent.
It added that near-term underwriting results will also be influenced by changes in reported loss reserve development. The P/C industry has benefited from a decade of favourable reserve development experience.
However, industry reserve strength diminished marginally over time and most recent accident year business is unlikely to exhibit the strong redundancies of prior hard market periods.
"The US P/C industry is at a point in the market underwriting cycle where near-term conditions and profitability are likely to worsen further before any pricing improvement materializes," said James Auden, managing director, Fitch Ratings.
It stressed that weaker underwriting performance, combined with a reduced contribution to earnings from investment results, is placing considerable pressure on P/C insurer profitability.
The industry statutory return on surplus is projected to decline to 6.6 percent in 2016 from 8.5 percent in 2015 and fall further in 2017. If larger underwriting losses and even lower sustained returns on surplus (below 4 percent) emerge beyond 2017, Fitch's industry rating outlook could move to negative, and more individual ratings could be affected unfavorably.
But while market conditions are likely to worsen, Fitch also said that it maintains the stable rating outlook for both the commercial and personal lines sectors of the US property/casualty insurance industry in 2017, as the majority of ratings in the sector are supported by strong capital strength.
Fitch said it believes most insurers will be able to absorb near-term volatility and sector headwinds. "Pricing continues to trend unfavorably in most major P/C segments and there is no catalyst in sight in 2017 that would promote a meaningful shift in pricing trends" added Auden.
Fitch added that auto underwriting continues to remain weak. Commercial auto is a chronic underperformer. Competitive pressures and unfavorable claims trends are likely to hinder a return to underwriting profits in personal auto in 2017.
Catastrophe losses for the industry increased to $17 billion for the first nine months of 2016, up from $15.2 billion for all of 2015, driven by severe wind and Thunderstorm events in Texas and Florida. Fitch expects that losses from Hurricane Matthew will likely fall at the low end of estimates in the range of $2 billion-$8 billion.
"The P/C industry continues to undergo technological change particularly in the areas of distribution, policyholder interaction, risk selection tools, pricing and claims adjudication, and policy administration. While Fitch does not expect technology investments to necessarily lead to long-term return on capital improvement, keeping pace with technology is essential for expense structures and to minimize adverse selection risk," added Auden.
