Fitch: Rising US P/C Insurance premiums unlikely to lead to hard market

The favourable pricing trends of the current US property & casualty (P/C) insurance underwriting cycle are expected to continue, with the commercial P/C market in a hardening pricing phase after gaining momentum in the past two quarters, Fitch Ratings says in its new report, The Property/Casualty Underwriting Cycle: Shallower Market Peaks and Valleys Ahead.

However, it noted that competitive forces and less favourable claim trends in some key segments make it unlikely that recent rising premium rate trends will translate into hard markets with pricing that generates sustainable adequate capital returns.

“The P/C market has a history of cyclical underwriting performance driven by competitive factors and uncertainty in pricing risk, influenced by the interplay of capital, premium rates and profit expectations,” said Fitch. “The largest rate increases have been in loss-affected property and automobile segments, with increases recently spreading more broadly to other casualty segments. Changes in risk appetite and underwriting limits by a few prominent commercial lines underwriters and reinsurers also promote accelerated rate movement.”

Fitch said that industry underwriting performance is likely to slightly improve in 2019 from the 99 percent combined ratio reported in 2018. Commercial lines premium rate improvement is poised to continue through 2020, but Fitch warned that the potential for further significant profit improvement may be marred amid signs of higher loss severity and reserve weakness in several liability lines tied to rising litigation and tort-related costs.

“The P/C industry's competitive nature makes hard markets, in which the industry and the average company generate returns on capital at or above required rates, rare and short lived,” said Fitch. “Past hard markets were typically preceded by a period of larger underwriting losses and reductions in capital and underwriting capacity. The likelihood of a shift to a true hard market in the current cycle phase is unlikely as market capital and capacity remains ample and competitive pressures will eventually constrain pricing momentum.”

The 2019 survey from The Council of Insurance Agents & Brokers (CIAB) measured a 5.2 percent rate increase for Q2 2019 from the prior year, the largest change in over six years.

“However, the need for rate increases is less pronounced relative to past periods, but the potential for sustained pricing improvement remains uncertain,” noted Fitch.

It added that variability in the market cycle was more muted in the past decade, with several factors reducing the potential for extreme soft market conditions that provoked wide adverse turns in underwriting performance. These include advances in management information systems and growing sophistication in pricing analytics and risk management, resulting in quicker response to pricing errors and reducing underwriting variability.

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