The U.S. property and casualty industry will struggle in 2016 to sustain the historically favorable underwriting results that it has generated for three consecutive years as a result of elevated losses in private-passenger auto business, higher catastrophe losses and pricing pressure in several commercial lines of business, according to a new report released July 25 by S&P Global Market Intelligence.
The report projects an increase in the industry's statutory combined ratio to 99.5% in 2016 from 97.6% in 2015 and contraction in pretax returns on equity to 8.7% from 10.8%, or to 7.5% from 9.9% when adjusting for the impact of prior-year reserve development.
The personal lines combined ratio is projected to increase to 102.8% in 2016 from 100.7%, reflecting the challenges associated with the private-passenger auto line and the negative impact of the higher level of insured losses from natural catastrophes observed during the first half of the year. The commercial lines combined ratio is projected to increase to 95.1% from 93.4% in 2015, which represented the third-consecutive year in which the measure of underwriting profitability had ranged between 93.3% and 93.5%.
A number of auto insurers have pursued rate increases to address increases in claims frequency during a time in which low gas prices have led to higher levels of miles driven by American motorists. The outlook anticipates that the industry will not derive the full benefit from those rate increases until 2017, setting the stage for the combined ratio in the private-passenger auto business to rise in 2016 to a projected level of nearly 105.1% from 104.6% in 2015.
The homeowners line has benefited from three-straight years of relatively benign catastrophe losses and other positive factors, such as high levels of reinsurance capacity and several years of sizeable rate increases implemented by carriers. Recent data suggests, however, that higher catastrophes will negatively impact loss ratios in 2016 and that the significance of rate actions has waned such that the report projects the line's run of three years of sub-93% combined ratios will come to an end.
Premium growth in the commercial lines has benefited from factors such as slow, but steady macroeconomic growth and rate increases in commercial auto business, offset by continued downward pressure on commercial property rates. The outlook anticipates that the 93.9% combined ratio in the workers' compensation line in 2015, which marked the first sub-100% result in that business since 2006, will not be replicated, and that historically favorable results of the past three years in commercial multi-peril and the fire and allied lines will begin to normalize over time.
Factors such as abundant reinsurance capacity, favorable underwriting results and relatively high levels of capitalization have contributed to downward pressure on commercial lines rates. But the outlook assumes that carriers will, by and large, continue to exhibit discipline in their underwriting as recent contractions in Treasury yields in the aftermath of the U.K.'s June Brexit vote offer a reminder of the reinvestment risk the industry continues to confront in what remains a low-for-long interest rate environment.The report contains a full version of historical results for 17 distinct lines of business along with five years of projections for select statutory underwriting ratios, pretax ROEs and income statement line items for commercial lines, personal lines and the U.S. P&C industry as a whole.
Historical results reflect the aggregation of disclosures made by U.S.-domiciled P&C carriers that file annual statements with the NAIC on the Insurance Expense Exhibit, adjusted to exclude select entities classified as state funds or residual markets and certain companies that engaged in extraordinary, one-time transactions that had a disproportionate impact on industrywide financials. For pretax ROE calculations, the report uses the NAIC-specified formula for determining the allocation of surplus by individual line for investment gains, consistent with the methodology employed in an existing S&P Global Market Intelligence template for determining relative profitability.
The outlook reflects a sum-of-the-parts analysis and consolidation of the 17 distinct business lines, and it is informed by a variety of factors that include known one-time developments, conclusions contained in third-party research, anecdotal commentary from industry participants, trends observed from S&P Global Market Intelligence’s RateWatch tool, first-quarter 2016 statutory data and select macroeconomic factors based on consensus forecasts of economists as calculated by external sources such as The Wall Street Journal and the Congressional Budget Office.
The outlook makes a number of assumptions about factors impacting the P&C industry, including as it pertains to expectations for declining levels of favorable development of prior-year reserves over time, continued restraint in business practices during a low-for-long interest rate environment and benefits derived from broader deployment of robust data and analytics capabilities. It is subject to change, perhaps materially, based on future natural or manmade catastrophes, industry consolidation, favorable or adverse legal developments and various unforeseeable events. S&P Global Market Intelligence intends to make periodic updates as circumstances warrant.