International financial services rating agency, Fitch Ratings, has warned of declining profitability in the U.S. commercial insurance industry, driven by intense competition, reduced reserve strengthening and catastrophe losses.
“Industry competition has weakened market pricing significantly in the last three years, gradually taking a toll on profitability, and it’s unlikely we will see a reversal in pricing trends anytime soon,” said Jim Auden, Managing Director, Fitch.
Despite recording its fourth consecutive underwriting profit in 2016, the U.S. commercial insurance sector remains a challenging environment, a trend exacerbated by the influx of capacity from primary players, but increasingly reinsurers in search of more desirable profits.
Global, large reinsurance firms such as Swiss Re and Munich Re have, in recent times, made a greater move into primary commercial risks in an effort to offset the negative impacts of rate deterioration across the global reinsurance industry.
As a result, and combined with adverse reserve development and catastrophe losses, an already pressured industry is seeing profitability deteriorate across the majority of business lines, warned Fitch.
“Competitive market conditions, reductions in reserve strength and catastrophe losses are likely to push near term profits down further,” continued Auden.
Despite recording underwriting profit in 2016 the combined ratio of the U.S. commercial lines insurance market deteriorated by 4 percentage points, to 99%. Fitch attributes this, in part, to adverse loss reserve development reported by AIG in recent times, which had a “significant effect on overall industry results.”
Absent this, Fitch explained that “the industry commercial lines combined ratio was 3.4 points lower in 2016.”
Commercial property business continued to be a key driver of underwriting profits in the sector throughout 2016, and for the fourth year running recorded a combined ratio of sub-90%. However, the continuation of rate declines, exacerbated by the presence of reinsurers seeking to claim an increasing share of the market, and the expectation of more severe catastrophe losses, suggests weaker property results in the future, says Fitch.
Commercial auto recorded a combined ratio of more than 110% in 2016, says Fitch, making it the “weakest link” in the U.S. commercial lines insurance sector. While workers’ compensation continues to be a “bright spot” in a challenging sector, reporting segment combined ratios of 95% in both 2015 and 2016, says Fitch.
The profitability of the U.S. commercial insurance industry is clearly under threat, and with reserves reportedly shrinking, the potential for higher catastrophe losses, and the persistent entry of existing and possibly new reinsurers looking to assume some of the marketshare, it’s likely that more business lines will come under further pressure in the months ahead.
