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U.S. P&C industry outlook is stable, but pricing levels severely strained: S&P

6th February 2018 - Author: Marianne Lehnis

Backed by a build-up of excess capital from years of benign hurricane activity, the U.S. property/casualty (P&C) insurance industry has made it through the 2017 record catastrophe losses relatively “unscathed,” but pricing levels are now on shaky grounds and 2018 could bring the inflection point, according to a recent S&P report.

Image of a small wooden houseThe 2017 catastrophe insurance losses amounted to an earnings event for the largely stable sector, however, it could take years before the full impact of heavy losses is felt with the $20 billion-$40 billion gap between the amounts reported by companies so far and loss estimates.

This means that further down the line, in commercial property particularly, where analysts noted pricing complacency, the industry could see some impact on pricing.

“After a prolonged period of pricing complacency leading to rate inadequacy in many product lines, something has got to give in 2018.

“Industry participants are optimistic about getting much-needed rate increases in 2018, although we expect actual pricing momentum to be subpar.

“Pricing levels are not meeting claims costs, but we may see an inflection point in 2018. We expect pricing trends to vary by line of business. On a composite basis, pricing is flat to up low single digits.”

Analysts warned that pricing discipline could be tested in 2018 as capital influx into the industry keeps on climbing in the face of record catastrophe losses.

Investment income is expected to remain the largest contributor to earnings in 2018, although reserve releases also continue to contribute meaningfully to overall earnings.

On the whole, the U.S. P&C insurance sector remains well capitalised with a stable outlook and an estimated 9% risk-based capital buffer at the ‘AA’ level per capital analysis, but challenges loom on the horizon in a pricing environment clearly considered to be unsustainable.

“Another avalanche masking true underwriting results is 10+ years of favorable reserve development, which we acknowledge is not sustainable, but we have not seen the turning point. After a prolonged period of pricing complacency leading to rate inadequacy in many product lines, something has got to give in 2018. Even though we expect pricing to improve, our combined ratio forecast near 100% implies a bleak pricing correction,” S&P said.

Analysts added that the real test is “how the industry will fare if 2018 catastrophe losses mimic last year’s activity and if reserve development becomes unfavorable. The sector benefits from excess capital levels but it needs to improve its operating fundamentals to maintain this edge. In fact, our stable sector outlook depends on it.”

The effectiveness of insurers’ enterprise risk management programs as well as developing insurer losses that materially exceed risk tolerances, will be indicators of how the industry’s strength develops in 2018.

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