U.S commercial property & casualty (P/C) insurers should expect improved performance this year following a turbulent 2017, according to a new report by Fitch Ratings.
Representing approximately 41% of U.S P/C industry net written premiums, commercial lines experienced significantly weaker underwriting performance in 2017, reporting a combined ratio of around 104% versus 99% the year previous, driven by higher catastrophe losses on property business.
Fitch Ratings expects these poor performance results to improve following a return toward historical norms for catastrophe losses and pricing improvements in the worst performing market segments, which would better position commercial lines for modest profits in 2018.
Competitive factors and loss trends reduce the potential for larger, near-term profits that would correspond with adequate returns on capital for commercial insurers, a key factor in Fitch’s negative sector outlook for commercial lines.
Commenting on commercial auto insurance’s poor industry results, Managing Director James Auden said, “Commercial auto insurance remains a chronic problem for underwriters despite numerous rounds of rate increases and underwriting actions. Loss severity trends, rising litigation costs, shortages of experienced drivers and continued reserve weakness may limit the potential for underwriting improvement in the near term.”
Posting a third consecutive large underwriting gain in 2017, in what has historically been a volatile segment, workers compensation was the most profitable major commercial market segment. Despite competitive forces pointing towards deteriorating segment results going forward, another below 100% segment combined ratio in 2018 is likely.
Assuming a return towards historical-level catastrophe loss experience, Fitch Ratings suggests underwriting results are likely to revert back towards a modest profit in 2018. However, a more positive pricing movement or favourable changes in claims experience would be required to reach a combined ratio in the mid-90% range, achieved from 2013 to 2015.