The U.S. property and casualty market appears to be experiencing a scene from the movie “Groundhog Day,” operating in a market where little has changed from a year ago, notes A. M. Best in its 2011 Review & Preview report for the insurance industry. How P&C carriers may respond, however, reflects a market where change will be mandatory.
The report asserts that the majority of the industry remains in the throws of a soft market cycle, with pricing relatively unchanged, competition high and the economy weak. “No event, natural or manmade, has been significant enough to change the course of the cycle or bring those maneuvering through it to the finish line,” note the report’s authors, Michelle Baurkot, AVP, and Edward Keane, senior financial analyst.
Based on interaction with insurance management personnel and other authoritative sources, the A.M. Best report offers a broad perspective on the elements that are affecting each of three P&C sectors, personal, commercial and reinsurance lines. That perspective includes what the rating agency calls growing realization that, against a market of sameness, insurers are not operating under conditions that represent business as usual.
“There is a growing realization that overall risk should be better recognized, quantified and managed, when possible,” note Baurkot and Keane.
Specifically, insurers are now managing risk in a market highlighted by growing competition, rate decreases (especially in commercial lines), weak macroeconomic conditions, excess capacity and above-average catastrophe activity.
“The current cycle has been increasingly difficult, as the industry has been dealt many wild cards,” note Baurkot and Keane, who cite the confluence of the recent financial crisis, the economic recession and above-average storm activity as being forces that have not, to date, been significant enough to change the course of the soft market.
Not surprising, A.M. Best has maintained a stable outlook for the personal lines and U.S. reinsurance segments. Commercial lines is another story, having been revised from stable to negative because of an anticipated sluggish economic recovery, continued price deterioration, erosion in reserve levels and higher accident-year combined ratios, notes the report.
One issue impacting all three sub-sectors is the industry’s overall net investment gains, which increased approximately 34% to $56.9 billion in 2010 from $42.4 billion in 2009, benefiting from a $16.4 billion swing in realized capital gains, which offset a continued decline in investment income, notes the report.
The authors say that coming into this period, without meaningful investment income to offset underwriting losses, many insurers were forced to take a hard line on accounts that had been profitable.
“This was extremely difficult, as prudent underwriters know that a good piece of “known” business is more profitable at low rates than “unknown” business,” note the authors.
The authors hold that improved technology, including the many new iterations of predictive modeling, provided the quantitative backing necessary to support these tough “walk-away” decisions.
Further, P&C insurers are expected to invest heavily in technology across all facets of the insurance enterprise, including underwriting, claims and agency management. Baurkot notes that investment in core system technologies such as policy administration not only enables greater efficiency in current business, it provides the platform to grow without large increases in headcount. “I think it is anything that make the companies more efficient so that they can do more with less,” she tells Insurance Networking News. “The other thing we noted is a trend toward having better interaction and information exchange with agents, such as portals.”
A.M. Best believes that carriers will also build on its use of predictive modeling for both auto and property lines, and will expand their use of predictive analytics tools, including telematics.
Over the next 12 months, the U.S. P/C industry will face increasing headwinds that will pressure operating performance and capital levels for many industry participants; note the report authors. Nevertheless, the rating agency says it does not expect an overall turn in the market over the near term.
“Despite the cyclical nature of the industry, the combination of risk management, prudent pricing, underwriting discipline and reserve adequacy remains the foundation for insurance companies’ long-term success,” concludes the report.
Specifics on the various sectors’ net premiums written, underwriting performance and overall investment gains are available to A.M. Best members.
