Recent stabilization of industry-wide pricing and the view that commercial insurers' maintain solid capital adequacy and balance sheet strength are some of the issues noted in
The ratings firm notes that currently U.S. reserves remain adequate-to-slightly redundant across standard lines, despite significant reserve releases and overall weakening trends for recent accident years.
Moody’s VP Alan Murray, author of the report, "Outlook for U.S. Commercial Insurance Industry Shifts to Stable," said in a statement, "Capital adequacy -- though below peak levels in 2006 -- remains strong by comparison with prior late-down-cycle historical averages on a risk adjusted basis, which should enable insurers to absorb prospective underwriting and capital market volatility without meaningful impact on financial strength. We've seen a progressive stabilization of pricing in the sector in 2011, particularly for casualty insurers, and business is beginning to flow back to the excess and surplus lines sector, from standard commercial insurers, suggesting that the underwriting cycle is poised to turn."
Moody’s rating reflects macroeconomic conditions as well as the industry’s business cycle as being supportive of a stabilized outlook for the sector.
“While macroeconomic trends such as continued high unemployment and weak economic indicators will likely continue to dampen new business growth, commercial lines insurers are broadly reporting flat-to-modestly growing exposure counts following several years of exposure declines due to the financial crisis and economic recession,” noted the rating agency.
“Insurers will be under pressure to raise prices given weak current-year underwriting margins -- which will become more apparent as reserve releases dissipate, sustained low interest rates, and an active catastrophe year. However, absent a large financial shock and/or extraordinary catastrophe losses which results in a significant decline in capital, Moody's does not expect to see a classic ‘hard market emerge.’”
Moody’s says that the most notable differences between today and the last down cycle, which it refers to as being between 1997 and 2001, include: 1) the absence of an abundance of underpriced reinsurance capacity; 2) the disappearance of the poorest performing insurers; 3) lessons learned by sorely tested insurers that survived the fallout; 4) a broader functioning feedback loop among underwriters, claims adjusters and pricing and reserving actuaries; and 5) the absence of a festering tort liability system.
Thanks to the establishment of more formalized risk management protocols, and adherence to Sarbanes-Oxley compliance requirements, going forward commercial lines carriers will have a more robust framework within which to work.
