In 2015, the combined ratio will be less than 100 for the third year in a row in the United States property and casualty insurance industry, where larger carriers are “leading the charge” in data analytics and usage-based insurance for private passenger auto and where commercial carriers will face challenges including “uncertainties” around risks such as infectious diseases, terrorism and cyber risk, A.M. Best Company Inc. suggested in a report released Monday.
Oldwick, N.J.-based A.M. Best published its special report, titled U.S. P/C Industry Expected to Produce 2nd Consecutive Underwriting Profit, in which it released estimates on the financial performance of the industry in 2014 and projections for 2015, along with actual data from 2013 and prior.
A.M. Best is estimating the combined ratio in 2014 will be 97.2%, up from 96.4% in 2013. That ratio exceeded 100% in each of 2010, 2011 and 2012.
The “normalized combined ratio” – which excludes U.S. catastrophe, asbestos and environmental – is estimated at 92.2% in 2014 and projected at 93.7% in 2015. Asbestos and environmental is projected to account for 0.6% of the entire P&C industry’s combined ratio in 2015, the same level estimated for 2014.
“For 2015, the combination of forecasted catastrophe losses returning to a normalized level, a reduction in rate increases in virtually all lines and a lower amount of favorable development of prior years’ loss reserves is expected to result in another modest deterioration in underwriting performance,” A.M. Best said in the report, of the U.S. P&C industry. “If this forecast proves correct, it would mark the first time since the early 1970s that the industry’s underwriting has been profitable in three consecutive calendar years.”
A.M. Best is projecting net premiums written, for the industry, of $515.5 billion this year and estimated net premiums written at $501.1 billion in 2014 (up 3.9% from $482.5 billion in 2013). All figures are in U.S. dollars.
In commercial lines, net premiums written are estimated at $216.1 billion in 2014 and projected to be $222.2 billion this year. A.M. Best is estimating an underwriting gain of $3.5 billion in 2014 but projecting an underwriting loss of $1.5 billion this year.
The combined ratio in commercial lines – which was 96.7% in 2013 – is estimated at 97.7% last year and projected to deteriorate to 99.8% this year.
“A.M. Best believes that the commercial lines outlook remains negative and the current underwriting results will not be sufficient to surmount the numerous challenges facing many insurers in the industry,” according to the report.
Those challenges include low returns on fixed-income investments, attracting underwriting talent, the costs and challenges of regulation, the evolution of data and data analytics and “addressing the uncertainties surrounding historical and emerging issues such as terrorism, cyber risk and infectious diseases.”
In personal lines, A.M. Best estimated net premiums written were $241.3 billion last year and is projecting those to rise to $257.6 billion this year. The underwriting gain is estimated at $2.9 billion in 2014, projected to fall to $500 million this year.
The combined ratio in personal insurance was 97.5% in 2013, estimated at $98.4% last year and project to rise to 99.4% in 2015.
“Moderate rate increases continue for personal auto, but the real advancement is occurring in pricing segmentation and sophistication,” A.M. Best stated in the report. “The tools utilized continue to evolve as auto writers ramp up investments in data analytics and usage-based insurance. Usage-based insurance is becoming more commonplace, and advanced pricing segmentation is being achieved as insurers better understand the unique driving characteristics of each insured. The larger carriers are leading the charge in this arena as they continue to invest significant resources into these tools.”
In homeowners insurance, carriers are increasingly pricing risk by peril, A.M. Best suggested.
“In addition, risk management in this line continues to expand as insurers increase their focus on risks that are more susceptible to severe wind and hail events as well as extremely hot and dry conditions that may lead to wildfires,” according to the report. “Segmented pricing through the development of by-peril pricing algorithms, as well as greater granularity and deterministic modeling, continue to evolve and gain greater traction.”
A.M. Best included estimates for 2014 and projections for 2015 in different lines. For example, workers’ compensation, commercial multi-peril and commercial auto are estimated to have combined ratios of 100.9%, 101.1% and 106.8% respectively in 2014. The line with the lowest estimated combined ratio – 80.5% was inland marine, followed by fire and allied lines, at 88.1%.
In reinsurance, A.M. Best is projecting a combined ratio of 93.2% for 2015 and estimating that ratio at 88% in 2014.