Increased frequency of small weather events could end soft market in 2011

The U.S. property and casualty market held relatively steady during 2010, but an over-reliance on investment income, inadequate reserving and increasing frequency of weather events may tip the scales in 2011.
During an A.M. Best Webinar, State of the Property/Casualty Market, a team of panellists offered their views on the current state of the market.
Anthony Diodata, A.M. Best’s group vice president of property and casualty ratings, noted that in 2010 the industry’s surplus capital was up 9% over 2009.
“The thing to watch is where this surplus growth is coming from,” he said. With a combined ratio at 103.5%, it’s clear that underwriting is not producing income for the industry.
“It is the rebound in the investment market that is pointing to the realized gains that came back in 2010,” Diodata said. “Those were the driving forces for many companies’ increase in surplus.
“We all know from 2008 that investment income is a fleeting number. One year it will be here, the next it won’t. The concern is that the underwriting fundamentals for the industry as a whole are not enough to generate income.”
Andrew Colannino, vice president of commercial lines ratings at A.M. Best, said the commercial market segment has an estimated 2% deficiency in reserve adequacy (not including asbestos and environmental lines).
“The industry is still reporting some favourable development though, so there’s a bit of disconnect from what we’re seeing,” Colannino said. “We do expect that reserves will continue to develop adversely for the next several years. We believe companies have been optimistic when it comes to setting their loss reserves.”
Although 2010 saw a prolonged soft market, it also saw an increasing frequency of smaller weather events, drawing concern that this is the new norm.
“All of these events added up, and added up and added up,” said Richard Attanasio, A.M. Best’s vice president of personal lines ratings. “They wound up adding five or six points to the industry’s combined ratio. And then if you add in a significant event, like Hurricane Ike, that [cumulative loss amount] is way above the norm.
“That would be a significant concern, particularly for companies that don’t have significant risk management capabilities and the capital cushion to absorb that.”