While favourable pricing trends in the US property and casualty (P&C) market have been gaining some momentum this year, analysts at Fitch Ratings do not believe these increases are likely to cause a return to hard market conditions.
Competitive forces and less favourable claims trends in some key segments make it unlikely that the pricing uptick will enable re/insurers to generate sustainable capital returns at an adequate level, according to Fitch.
The rating agency acknowledged that the P&C market has a history of cyclical underwriting performance, and noted that premium rate improvement is poised to continue through 2020.
However, it believes that the potential for further significant profit improvement may be marred, with signs of higher loss severity and reserve weakness in several liability lines tied to rising litigation costs.
The competitive nature of the P&C industry also tends to make hard markets rare and short-lived, it said, arguing that a shift to hard market conditions would be unlikely in the current cycle phase given the abundance of market capacity.
Fitch added that variability in the market cycle has been more muted over the past decade, with several factors reducing the potential for extreme soft market conditions.
These include advances in management information systems and growing sophistication in pricing analytics and risk management, resulting in a quicker response to pricing errors.
Underwriting cycles may also differ considerably by individual segment or geography, Fitch said, pointing to the divergence in the performance of workers’ compensation and commercial auto insurance in recent years.
Pricing trends for these segments are moving in differing directions, which analysts believe will promote a convergence of underwriting results over time.
Workers’ compensation continues to be the most profitable commercial lines segment with an average combined ratio of 92% from 2015-2018, benefiting from past pricing actions, market reforms in key states and benign claims trends.
In contrast, the commercial auto segment reported a 110% combined ratio over the same period with continued claims severity issues and loss reserve deficiencies.
