U.S. P/C market underwriting loss could mean opportunities


An increase in catastrophe losses, less favourable loss reserve development and continued market headwinds saw private U.S. property/casualty (P/C) insurers record an unprofitable first nine months in 2016, according to data from ISO and the Property Casualty Insurers Association of America (PCI).

The group of private U.S. P/C insurance carriers recorded a net underwriting loss of $1.7 billion in the first nine months of 2016, compared with $1.5 billion loss in the first-half the year, and a $7.3 billion gain for the first nine months of 2015.

The fact the U.S. P&C insurance sector has not made it through the first nine months of the year in profit has been evidenced by higher reinsurance claims, as well as claims on ILS funds and collateralised reinsurance structures.

A new report on the sector’s performance during the nine-month period by ISO and PCI, shows that the insurers’ combined ratio weakened in the period to 99.5%, compared with 96.9% a year earlier.

2016 was clearly a challenging year for P/C insurers, and reinsurers for that matter, and a rise in catastrophe losses throughout the first nine months of the year impacted the performance of the marketplace. Net income after-tax for the group of insurers fell to $31.8 billion from $44.1 billion in 2015, and net LLAE (ratio of losses and loss adjustment expense) from catastrophe events increased to $18.8 billion in the period, an increase of $4.8 billion on the previous year.

Net premiums grew by 2.8% during the period, while annualized investment yield was 0.7% lower than the 3.6% reported a year earlier, says the report.

Some insurance and reinsurance industry players have now released overall, catastrophe loss estimates for 2016, revealing that the $210 billion of economic, and $54 billion worth of insured losses witnessed in 2016, is actually the highest for the last four years.

The increase in catastrophe losses and the impact this has had on insurers and reinsurers’ performance during 2016 is reflected in the underwriting loss reported by the U.S. private P/C sector, during the nine-month period.

Negative results, a weaker combined ratio and continued, less favourable reserve development suggests that the U.S. P/C industry is facing more losses, which, suggests more losses for reinsurers and also the insurance-linked securities (ILS) space.

The challenge with the increase in catastrophe losses in the current, overcapitalised and soft market environment is that they simply haven’t been large enough to drive any turn in the market, but large enough to increase losses for companies – resulting in a weaker combined ratio and lower underwriting results.

Furthermore, with ILS players continuing to expand their remit and broaden their reach, more frequent and potentially more severe catastrophe events suggests more attritional losses for ILS funds, a trend that has the potential to intensify as records point to more frequent cat events moving forward.

Of course it could also result in increased reinsurance demand as well, as these companies look to become better protected against the type of attrition from catastrophes and severe weather that they have seen in 2016.

That could result in an opportunity both for ILS capacity to back the sector with reinsurance, but also for innovative ILS capital providers to partner to more directly access the risk the P&C sector underwrites, bringing their efficient capital closer to the underwritten risk.

“The industry’s results continued to decline in the first nine months of 2016. Higher catastrophe losses and less favorable reserve development pushed the combined ratio above 99 percent and resulted in a net underwriting loss for the second quarter in a row. At the same time, there are some promising signs in the industry. Policyholders’ surplus continued to grow and reached a record high of $688.3 billion.

“The Federal Reserve raised interest rates in December 2016 and is expected to increase rates further in 2017. Still, it will take time for insurers’ investment yields to improve. To succeed in today’s market, insurers need to be focused on their underwriting. Those that incorporate robust data and analytics will be equipped to make the best possible decisions about the risks they insure,” said Beth Fitzgerald, President of ISO Solutions.

As the fundamentals of U.S. property and casualty insurers worsened in 2016, it could provide increasing opportunities both for traditional reinsurers and also ILS players, as capacity is capacity at the end of the day and an increasing number of companies are going to be looking for protection and also partners.

However, perhaps the best opportunity for ILS capacity is to find an innovative InsurTech player to partner with and bring capital market funding right to the point of P&C insurance sale.

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