Cat losses, lower reserve releases drive P&C unprofitability: ISO, PCI

Increased catastrophe losses in the first-half of 2016 and less favourable reserve development contributed to a rise in the combined ratio of P&C insurers, which reported an underwriting loss after a run of gains that started in 2013, according to ISO and the Property Casualty Insurers Association of America (PCI).

Private U.S. property and casualty (P&C) insurers reported a $1.5 billion underwriting loss in the first-half of 2016, the first year-to-date net underwriting loss in over three years, according to a report from ISO, a Verisk Analytics business, and PCI.

Catastrophe losses in the first-half of 2016 increased when compared to previous years that have experienced benign losses, which, has helped insurers and reinsurers remain profitable at a time when returns are dampened, but also contributed to the ongoing softening landscape.

At the same time, re/insurers have been seen to release prior year reserves in order to bolster quarterly and annual returns, a trend that combined with the benign loss experience, has led to reports that reserves might be running thin for some in the space.

“Higher catastrophe losses and less favourable reserve development pushed up the combined ratio and generated net underwriting losses for insurers,” says the report.

P&C insurers’ combined ratio deteriorated from 97.6% in H1 2015 to 99.8% in the first-half of this year, revealing how close the sector is to operating at an unprofitable level. The net underwriting loss of $1.5 billion recorded compares to a net underwriting gain of $3.5 billion a year earlier and, the report reveals that net written premium growth for the space slowed as well.

These are clearly very challenging times for the U.S. P&C insurance sector, and with a return to more normalised losses and the fact that reserves appear to thinning, leading to an underwriting loss and profit deterioration, it will be interesting see how the industry copes in the face of a large event in the closing months of the year.

With that in mind, hurricane Matthew continues to track towards Florida and looks increasingly likely to make landfall as a powerful storm, although only time will tell what, if any impact the region will experience from the storm.

The impact of hurricane Matthew could see U.S. P&C insurers in need of greater reinsurance protection, which would be beneficial to the reinsurance industry as it continues to struggle with the abundance of capital and resulting supply/demand imbalance.

At the same time, if there is a large loss the industry could find it harder to re-capitalise owing to the current market environment, so it will be very interesting to see how the market reacts to the impact of hurricane Matthew, and we will certainly be keeping a close eye on the developments here at Artemis.

Exacerbating the benign losses period in recent times has been the abundance of alternative reinsurance capital and also the low interest rate environment, all of which have contributed to the softening re/insurance landscape.

With reserves thinning and profits on both sides of the balance sheet increasingly difficult to come by, an increased volume of cat losses in the second-half of 2016, as seen in H1, could place the P&C insurance sector in a very difficult position, and would likely see a number of firms report heightened losses and further deterioration of ROEs and combined ratios.

Discipline and efficiency remain key in the softening landscape, and with hurricane Matthew threatening Florida and elsewhere, it’s a reminder of the need to prepare for such events during times of benign activity, and not to get complacent.

“The industry’s results continued to worsen in the first half of the year, as insurers reported a first-half net underwriting loss for the first time since 2012 and saw their combined ratio exceed 99 percent.

“Catastrophe losses remained higher than in previous years. Texas was hit by a hailstorm that has been described as the costliest in the state’s history, and several states in the central United States experienced severe thunderstorms. With interest rates and investment yields remaining low, insurers must find ways to improve operational efficiency while still providing valuable coverage for their policyholders,” said Beth Fitzgerald, President of ISO Solutions.