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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