Analysts at KBW are predicting persistent rate increases and solid core underwriting margin expansion for most commercial insurance and reinsurance lines in 2021, but particularly for specialty.
In contrast, personal lines are set to face sustained rate competition and underwriting margin compression, especially in auto.
Over the course of 2021, KBW also expects a post-COVID economic recovery to boost exposure units, driving premium and broker commission volume growth.
Commercial lines and reinsurance should see rates boosted next year by catalysts such as heightened property and casualty loss cost inflation, pressured investment yields, and rising reinsurance costs, KBW noted.
But workers compensation rates will remain flat, while very strong recent underwriting results and growth focus among market will temper personal lines rates.
Rate increases should increasingly translate into core commercial lines loss ratio improvement overall, KBW believes, augmented by volume-driven expense ratio improvement.
This will be moderated to some extent by more conservative initial loss picks, at-best modest earned workers compensation rate increases, and normalizing post-COVID claim frequencies.
Analysts further predicted that re/insurers will win the majority of COVID-related business interruption litigation cases in the US, which suggests there could be some reserve strengthening over the year.
However, investment income across the re/insurance industry is set to remain under pressure due to continued interest rate decreases.
While this could impact earnings, KBW noted that it could also sustain the industry’s pricing resolve, especially within longer-tailed P&C lines.
“We unequivocally expect core underwriting margin expansion in all major commercial lines of business besides workers compensation, stemming from earned rate increases that exceed loss trends,” KBW concluded.
“That said, actual reported margin expansion will almost certainly trail the mechanically calculated difference between earned rate increases and loss trends, reflecting the industry’s (regrettable, in our view) tendency toward more conservative loss picks as rates rise, and vice versa.”
