Strong capital reserves kept the industry afloat in 2017, but will low investment yields hurt the industry in 2018?After a year of record-setting losses, commercial insurers head into 2018 in relatively good shape thanks to sharpened risk management practices and healthy reserve levels. The industry’s strength even prompted insurance analytics firm A. M. Best to elevate the sector’s outlook to stable from negative, the first time it upgraded its rating since 2011.
Despite absorbing twice as many catastrophe losses as it suffered in 2016, A. M. Best wrote that those losses stayed well within insurers’ risk parameters and catastrophe programs due to the sector’s overall enterprise risk management methods. Strong investment results also helped the sector post record net profits even as it sustained those underwriting losses. “Changes in underwriting and pricing fundamentals have resulted in core underwriting results that coupled with overall strong risk-adjusted capitalization levels are allowing companies to absorb shock losses that previously would have strained capacity,” A. M. Best concluded.
Nevertheless, A. M. Best warned that the industry faces hurdles in the year ahead, among them a competitive marketplace that limits price hikes, investments yielding below the rates on maturing securities, and continued challenges in the auto insurance sector. A. M. Best said that it might have to revise its outlook if any of those areas register significant shifts as the year progresses, but for now, the firm doesn’t foresee any “substantial deterioration” in the landscape for 2018.
Deloitte: “A Temporary Dent”
Similar to A. M. Best, Deloitte noted in its 2018 Insurance Industry Outlook that U. S. property and casualty insurers’ underwriting losses doubled to $5.1 billion in the first half of 2017, a staggering turnaround from the $3.1 billion it posted in profits two years ago.
Higher catastrophe and auto claims resulted in a 29% decline in net income in the first six months of 2017, a figure which was tallied before a trio of hurricanes hit the U. S. and Puerto Rico. Since the industry’s surplus hit a record level of $704 billion by the middle of the year, however, Deloitte commented that insured losses from natural disasters “would be unlikely to put more than a temporary dent in those reserves.”
As such, those losses would constitute “earnings events” for most primary insurers, not a serious blow to their capital structure. Nevertheless, Deloitte cautioned that catastrophe-related claims present a more lasting problem for reinsurers and issuers of insurance-linked securities.
As for an auto insurance market beset by raising claim costs, Deloitte urged insurers to take advantage of innovative technology like telematics and usage-based insurance (UBI) policies to accurately price premiums. “This would require development of more predictive underwriting models based on actual driving performance, as opposed to many of the proxy data sources used by traditional auto policies,” Deloitte wrote.
Reinsurers See Modest Rate Increases
As Deloitte suggested, reinsurers will feel the brunt of insured losses stemming from last year’s natural disasters. That notion was reinforced when Fitch Ratings tagged the global reinsurance sector with a negative outlook, citing continued pressure on earnings from competitive pricing and low investment yields.
Natural disasters pushed insured losses worldwide to $130 billion, making 2017 one of the most costly years on record for the insurance sector. Fitch noted, however, that those losses “had a relatively limited impact on most reinsurers' capital as they were well spread between insurers, reinsurers and capital markets, and we did not downgrade any reinsurers as a result.”
The rating agency added that capacity shortages are unlikely due to the growth of the alternative capital sector. It also said that “insurance-linked security investors have already largely replenished most of the capital consumed by last year's catastrophe losses.”
A sharp upturn in insured losses, however, doesn’t appear to have had a significant impact on global reinsurance rates. According to Fitch, reinsurance buyers saw only modest rate increases on renewals as the new year began, though some U.S. loss-affected reinsurance programs were hit with double-digit hikes.