Combined ratio for U.S. p&c to increase 1.2 points in 2016: A.M. Best

The combined ratio will rise from 98% in 2015 to 99.2% for the property and casualty insurance industry in the United States, while for the U.S. and Bermuda reinsurance industry, the combined ratio will deteriorate by 6.7 points, A.M. Best Company Inc. projected in a report released Friday.

The Best Special Report – a 2016 Review & Preview of U.S. P&C – includes actual statistics for 2010 through 2014, estimates for 2015 and projections for this year. [click image below to enlarge]

Combined ratios were 101.1% in 2010, 106.5% in 2011, 102.5% in 2012, 96.4% in 2013 and 97.4% in 2014, reported A.M. Best, an Oldwick, N.J.-based investment ratings firm. Those ratios are for the U.S. P&C industry excluding the mortgage and financial guarantee segments.

In projecting a 1.2% deterioration, from 98% last year to 99.2% this year, A.M. Best stated it is “factoring in of a more normal level of catastrophe activity for the industry overall.”

In 2015, there were no earthquakes causing significant damage in the U.S. and no Atlantic storms made landfall on the continental U.S. as hurricanes. The last Category 3 hurricane to make landfall on the continental U.S. was Wilma in 2005, A.M. Best noted.

(In October, 2012, Hurricane Sandy had been downgraded to tropical storm status before making landfall about 200 kilometres south of New York City).

Records from the United States National Oceanic and Atmospheric Administration – dating back to 1851 – show the absence, since 2015, “of major storms making U.S. landfall is the longest in history,” A.M. Best noted. Hurricane Loke and Tropical Storm Malia “did make technical landfall in Hawaii but the storms caused no reported damage when they passed over uninhabited atolls in the Northwestern Hawaiian Islands,” A.M. Best added.

In the review and preview, A.M. Best is projecting a 97.3% combined ratio for U.S. and Bermuda reinsurers, up from an estimated 90.6% in 2015. The actual combined ratio was 87.5% in 2014.

Those figures are based on a composite of 20 reinsurance companies in the U.S. and Bermuda market.

For U.S. P&C, one factor in the increase in combined ratio, in 2015, was a lower favorable development of prior years’ loss reserves.

“A.M. Best expects the industry to report its tenth consecutive year of favorable reserve development for calendar year 2015 but at a lower level than observed in recent calendar years,” the company reported, adding the reserve position strengthened over period 2002 through 2007 but = is estimated to have weakened since then.

“The weakening is expected to be much lower in 2015 due to continued asbestos and environmental strengthening combined with AIG’s recently announced large reserve charge,” A.M. Best stated.

On Feb. 11, American International Group Inc. reported a combined ratio in commercial P&C of 161.5% in the three months ending Dec. 31, 2015, up 58.1 points from 103.4% during the same period in 2014. A major factor in that deterioration was the strengthening of loss reserves by $3 billion, AIG said at the time.

“This reserve strengthening was primarily in the long-tail classes of business, particularly U.S. excess and primary casualty and financial lines, reflecting adverse development on prior accident years, particularly in accident years 2010 and prior,” New York City-based AIG stated Feb. 11 in a press release announcing its financial results for 2015.

As a result of AIG’s announcement, A.M. Best “expects that favorable loss reserve development for the industry overall will decline to approximately $87 billion, or a total of 1.7 combined ratio points,” A.B. Best said in its review released Feb. 19.

A.M. Best estimates net premiums written, for the U.S. P&C industry, were $516.4 billion in 2015, up 2.7% from $502.9 billion in 2014. It projects net premiums written to grow by 2.1% to $527.2 billion this year.

Those growth rates were 4.4% in 2012 and 2013 and 4.3% in 2014.

“At a market level, competition and the availability of capital continue to place downward pressure on rates, even as companies look to maintain market share.”