May 18, 2016 by Canadian Underwriter
Underwriting performance for the commercial lines sector in the United States is likely to deteriorate in 2016, according to a report released on Tuesday by Fitch Ratings.
The decline follows a three-year underwriting profit for the industry, with a combined ratio of approximately 94% in each of the last three years (from 2013 to 2015), Fitch Ratings said in a statement.
“Catastrophe losses below historical norms contributed to strong 2015 commercial market results; however, results will likely stumble in 2016 as industry competition heats up and premium rates are declining in a growing number of product segments,” Fitch managing director James Auden said in the statement.
Renewal rates are flat or declining for most commercial market segments following a hardened market from 2011 to 2014. The price competition comes from underwriting success and market capacity expansion from earnings accumulation. As price competition intensifies however, this will likely be a drag on premium growth, according to Fitch, noting that commercial lines written premium volume grew by only 1.8% in 2015.
Workers compensation, the largest commercial lines segment, has steadily improved over the last five years to a significant underwriting profit in 2015; however, Fitch views these results as a cyclical peak with future results deteriorating due to competitive pressure and the inherent volatility in this business.
Commercial automobile liability insurance continues as a standout weak performer, generating a large 2015 underwriting loss and adverse loss reserve development due to claims severity issues, Fitch said. While commercial auto business continues to have meaningful premium rate increases, the ratings firm expects the segment to generate another underwriting loss in 2016.
Favourable loss reserve development from prior underwriting periods declined in 2015, representing 2% of calendar year commercial lines earned premium. American International Group, Inc.’s large fourth quarter reserve charge significantly affected this result, the release pointed out.
“Commercial property results will greatly influence overall commercial market results for 2016, a reversion toward more severe catastrophe losses would lead to a sharper decline in 2016 performance,” added Auden.