US personal lines sector softening, but outlook remains stable

The hard market that has dominating the US personal lines insurance sector is exhibiting a softening trend, a result of record catastrophe losses (about $27 billion) experienced in 2004. According to the report recently released by Standard & Poor’s Ratings Services “U.S. Personal Lines Insurer Mid-Year Outlook: Market Continues To Soften Despite Heavy 2004 Catastrophe Losses” the softening trend is especially prevalent in the auto insurance market.
Although catastrophe loses mounted because of four major hurricanes that hit during the fourth quarter, damage was insufficient to promote significant nationwide rate increases in the homeowner’s lines of business. Furthermore, the Insurance Information Institute’s projection of a 2.5% increase in homeowner’s rates would constitute the smallest rise in six years
Auto insurance rates are also slower to rise in 2005 with an increase of1.5% compared to 6% in 2004. Auto rates are slow to rise are not expected to rise as profit and a reduced occurrence of auto accidents are contributing to the decrease of upward pressure on rates.
In addition, consolidationespecially in the nonstandard auto insurance marketis an increasing possibility as the pricing cycle peaks. Buyers seeking to acquire growth will drive new acquisitions.
Standard & Poor’s credit analyst Polina Chernyak says currently, fundamentals are sound and the outlook on the personal lines sector remains stable despite the potential negative affect weakening fundaments, declining premiums and rising interest might have on operating performance.
“The personal lines sector is at a crucial point now, a point at which companies could be tempted to discount product offerings to build market share,” Chernyak added. “Similar conditions helped result in the last soft market in 1987-2001. The concern is that this trend toward weaker operating results could soon reassert itself, especially given the higher yields available on investments as interest rates rise generally in U.S. financial markets.”
Advertising expenditures and looser underwriting standards currently define the lash back of the softening trend.
Standard & Poor’s expects the current soft cycle to be shorter than previous ones as a result of recent improvements in pricing and the practice of more rigid underwriting accuracy through increasingly sophisticated operational tools.