THE YEAR AHEAD
2017 PROPERTY-CASUALTY OUTLOOK:
Back to Basics
OUR FORECAST for the property-casualty industry is for a slowing of premium growth and slight deterioration in profitability. Separating the industry into commercial versus personal lines( roughly 50 / 50) paints two very different pictures. With auto at two-thirds of personal lines, the frequency and severity challenges facing insurers dominate the results. We forecast personal auto combined ratios in the 106 %– 107 % range. As a result of this profitability challenge, premiums are growing at mid-single digits as healthy rate increases are pushed through. The homeowners line, in contrast, is forecast to produce an underwriting profit, even with an average cat load that is greater than what homeowners insurers experienced over the past four years.
The commercial lines combined ratio is forecast to produce an underwriting profit, although the premium growth expectation is only around 2 percent for 2017. With the exception of commercial auto( experiencing similar loss drivers as personal auto), all commercial lines rate changes are negative, and we do not see a catalyst to turn these in the near term. These trends continue to maintain the focus on distribution and distribution expenses, fueled by the revolution in InsurTech. Election Effect
In addition to the general expectation of a more friendly and constructive business, tax, and regulatory environment, here is our take on items most likely to affect the property-casualty industry:
• Many of the priorities and issues outlined by the Federal Insurance Office( FIO) in its annual reports are likely to receive less attention, including the overall shift to a greater federal regulatory role, disparate impact remedies, and pricing based on affordability. The National Association of Professional Insurance Agents has gone so far as to recommend repealing the FIO. Companies that write higher risk coverage are likely to find themselves more at ease with current business practices and less concerned about potential changes to traditional rating practices.
• The National Flood Insurance Program, with $ 23 billion in debt, is up for reauthorization later in 2017. Progress has been made in developing a more robust private market, and this shift should accelerate with the new administration. Companies that have begun developing private flood alternatives should be beneficiaries.
• Changes to the Affordable Care Act could reduce some of the cost shifting that has affected certain propertycasualty lines with a higher medical cost component, such as workers’ compensation, auto liability, and medical professional liability.
• A rollback of some of the provisions of Dodd-Frank, including the Consumer Financial Protection Bureau, would also be a positive, although less directly applicable for property- casualty companies.
• A lower corporate tax rate would be a positive for companies with significant US-based taxable income, but could reduce the attractiveness of muni bonds as well as narrow the advantage of Bermuda and similar domiciles relative to the United States.
Pressures On Underwriting And Expenses
The expectations for low interest rates and competitive market conditions continuing into 2017 mean that insurers cannot relax focus on disciplined underwriting and expense control. With the five-year Treasury yield less than a third of its 2000 level, the industry’ s investment income ratio has come down from 15 percent to under 10 percent of earned premium.
We expect to see more limited use of traditional outlets to release capital via share buybacks and dividends in view of rising regulatory and rating agency capital requirements. Insurers will likely seek to deploy capital to underwrite more margin-rich business segments. Still, with many insurers chasing the same targets, rising competitive pressures will likely squeeze margins and drive insurers to sharpen their underwriting tools.
Another likely industry trend in 2017 is a redoubled focus on expenses. In 2016, the industry’ s expense ratio of 27.4 percent( estimated) was higher than the average expense ratio of 26.9 percent for the past quarter century. With diminished contribution from investment income and the implementation of numerous labor-saving technologies, we are likely to see actions in 2017, including mergers & acquisitions and operational restructuring, to bring down the expense ratio.
Excerpt reprinted with permission from The Conning Commentary( January 2017). This article( edited for style only) represents the views of Conning, a leading global investment management firm with a long history of serving the insurance industry.
SPRING 2017
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