Sentiment is positive but headwinds challenge growth

While the industry is well capitalised and market sentiment mostly positive, there is still evidence of economic and market-based headwinds that will challenge profitable growth, according to a study by Guy Carpenter.

In the 2017 edition of the annual report, Plotting a Path in a Changing Market, Guy Carpenter outlines a dynamic insurance industry facing a changing economy and pressure in once-stable lines, but with opportunity for those with management skill and understanding of risk.

“On the surface, 2016 represented a record-setting year for the P&C insurance industry, with surplus reaching its highest level in history. Rate reductions continued to moderate, and there was optimism following the 2016 election given the potential for tax cuts and deregulation.

“Yet red flags remained, and a closer look at the individual metrics contributing to the growth in surplus revealed interesting trends,” said Tim Gardner, president of North America for Guy Carpenter.

The report, which is produced through Guy Carpenter’s ongoing Insurance Risk Benchmarks analysis of vast amounts of market data, focuses on risk and performance of US property/casualty insurers.

In 2016, emerging risks, catastrophe frequency and severity and shifting capital needs all contributed to a 0.4 percent industry underwriting loss, its first calendar year underwriting loss since 2012.

Reduced margins and adverse development reflect a competitive environment supported by excess capital levels, direct written premium growth slowed and higher realised and unrealised capital gains were skewed by the performance of some large companies who use underwriting cash flow to fund investments.

The average large property/casualty carrier saw its accident year loss ratio increase by 2 percent from 2015. The auto segment posted losses due to both frequency and severity shifts. Only 10 and 30 of the top 100 personal auto and commercial auto writers, respectively, made an underwriting profit in 2016.

The personal auto losses came to a line normally considered the cornerstone of profitability. The industry’s accident year loss ratio increased from 62 percent in 2013 to 67 percent in 2016, and its 10-year run of favourable prior period development ended.

“The personal auto losses forced smaller companies to rethink strategy and mix of business as the large writers continued to engage in the predictive modelling and marketing war,” added Julia Chu, managing director at Guy Carpenter.

In addition to the report, the Risk Benchmarks Statistical Supplement provides more detailed trend, state and market segment data for actuaries and capital modellers, and is available to clients upon request. Guy Carpenter’s BenchmaRQ® Advisory Services and Strategic Advisory practice can customise client-specific analyses using data and information from the Risk Benchmarks research.

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