In a review of highlights from A.M. Best’s annual report for the U.S. property/casualty (P/C) insurance industry, the rating agency warned of insurance and reinsurance companies playing a potentially “dangerous game” of loosening up underwriting standards after seeing a spike in investment income.
One of the major concerns of the current circumstances where markets have seen a modest increase in investment income, from A.M. Best’s perspective, is that insurers and reinsurers will see potential to earn more out of investment income and loosen up underwriting standards and make it up on the investment side.
Senior Managing Director and Chief Rating Officer (CRO) Stefan Holzberger, said; “It’s a very dangerous game to play and something that we’ll watch carefully.”
A.M. Best’s Chief Rating Officer explained commercial writers are responding to a challenging underwriting environment and an abundance of capital, by “using vehicles like share buybacks – using dividends to try to right-size their balance sheet, but they also want to be growing and writing business and in this market with limited room for growth and limited opportunities to put that capital to work – that’s really what’s driving the rates and essentially profitability down.”
Holzberger said the surplus capital across all three insurances lines is both one of the industry’s greatest challenges and one of its greatest strengths; “There’s a significant amount of excess capital and that’s a real benefit from a credit standpoint and for policy holder security – but it’s driving intense competition.”
He commented that the re/insurance industry had been “fairly fortunate” over a number of years, having escaped big natural catastrophes; “Hurricane Matthew last year, could’ve been much worse, we dodged a bullet.
“Unfortunately there was still substantial damage, I’m not trying to say that it wasn’t a significant event for the industry, but again soft market conditions means a loosening and relaxing of terms and conditions, we’ll have to wait and see after the next big event, which is a when not an if.”
The rating agency said it would carefully monitor how companies have managed their book of business, and their aggregate exposure, to be able to withstand and successfully manage a big catastrophe event in the U.S.
