Moody’s: Personal Lines Stable, but Weather Taking Toll on Profits

NU Online News Service, Aug. 30, 2:50 p.m. EDT

Personal lines insurers’ capital strength and core underwriting earnings power should offset challenges posed by natural catastrophes; high-frequency, low-severity weather events; and the “very competitive nature of the market,” according to Moody’s Investors Service.

As such, in its August 2011 Industry Outlook, Moody’s says it is maintaining its stable outlook on the U.S. personal lines industry.

While the general macroeconomic trends, such as high unemployment and a slow housing-market recovery, are impacting new-business growth, Moody’s notes that personal lines are, relative to commercial lines, insulated from these trends. “Coverage for personal auto and homeowners' insurance is typically mandatory and customers generally continue to pay policy premiums during periods of financial distress,” Moody’s notes.

New home and car sales may be down, limiting exposure growth, but insurers benefit from fewer drivers on the road in times of high unemployment as claims frequency declines, the rating agency says.

For auto insurers, Moody’s says it expects usage-based insurance to gain momentum, and notes that carriers that are at the forefront of offering such products will gain a competitive advantage by being able to develop more-sophisticated loss-cost models based on information gleaned from telematics devices.

Moody’s says, “Currently, insurers use a few variables as proxies for good or bad driving begavior—age, gender, driving history, and in some states credit score. Usage-based insurance would allow insurers to use concrete vehicle operation data, resulting in improved, more-sophisticated loss-cost modes based on variables more-correlated with actual driving behavior, with the goal of more-accurate pricing and better risk segmentation.”

Auto rates continue to rise moderately, combined ratios have been relatively profitable since 2003, and auto claims frequency in 2010 was “generally benign, given little change in total miles driven from the previous years,” Moody’s says.

For homeowners insurers, Moody’s notes that, according to Munich Re, 2011 first-half weather events have caused losses of nearly $18 billion, more than twice the January-to-June average over the past 10 years. “These figures will negatively impact personal insurers’ results for 2011, and in some cases materially,” Moody’s says. Insurers are also exposed to more-frequent but less-severe weather events like tornadoes and hail storms.

The rating agency explains that reinsurance protection for these losses is limited, as it is often prohibitively expensive to purchase.

All told, Moody’s says above-average 2011 weather losses have reduced earnings by 80 percent for personal-lines insurers collectively, not including the impact of Hurricane Irene.

Like auto insurance, homeowners rates have risen, driven by insurers’ responses to the weather events. Combined ratios, though, have been volatile because of these events.

Residual Market TrendsExposure to natural catastrophes continues to increase due to demographic shifts toward coastal regions, Moody’s notes, but the risks are increasingly being written by public systems rather than private insurers.

“Property insurance coverage provided by these involuntary [public] programs has significantly increased over time,” Moody’s says. “According to the Insurance Information Institute, total policies in force—both habitational and commercial—in the nation’s state-sponsored insurance pools collectively nearly tripled from 0.9 million in 1990 to 2.8 million policies in 2010, a record high.”

Moody’s notes that these systems usually charge rates below levels that reflect actuarially-sound prices, discouraging private insurers from competing in these areas.

Generally, for personal-lines insurers, Moody’s says it expects core underwriting earning—excluding catastrophes and investment gains/losses—to “stay relatively stable over the next 12 to 18 months, given rational, though high, competitive behavior and the rising rate environment.”

About the Author
Phil Gusman, PropertyCasualty360.com

Phil Gusman, PropertyCasualty360.com

Phil Gusman is Managing Editor of PropertyCasualty360.com. Prior to joining National Underwriter in 2008, he was Editor of Insurance Advocate. Gusman has also served as Associate Editor of Crackdown!, an insurance fraud publication, and Assistant Editor of Empire State Report, which covers New York politics. He graduated in 2002 from Plattsburgh State University in New York. Gusman may be reached at pgusman@summitpronets.com. Follow him on Twitter: pgusman and PC360_Markets

Comments

Resource Center

View All »

Get $100 in leads with $0 down!

NetQuote's detailed, real-time leads have boosted sales for thousands of successful local agents across the...

The Growing Role of Excess & Surplus Lines in Today’s...

The excess and surplus market (E&S) provides coverage when standard insurance carriers cannot or will...

Increase Sales Conversion with this Complimentary White Paper

This whitepaper will share proven techniques - used by many of the industry's top producers...

D&O Policy Definitions: Don't Overlook These Critical Terms

Unlike other forms of insurance where standard policy language prevails, with D&O policies, even seemingly...

Environmental Risk: Lessons Learned from Willy Wonka and the Chocolate...

Whether it’s a chocolate factory or an industrial wastewater treatment facility, cleanup and impacts to...

More Data, Earlier: The Value of Incorporating Data and Analytics...

Incorporating more data earlier in claims lifecycles can help you reduce severity payments by 25%*...

How Many Of Your Clients Are At Risk Of Flood?

Every home is vulnerable to flooding. Learn four compelling reasons why discussing flood insurance with...

Gauging your Business Intelligence Analytics Capabilities and the Impact of...

Big Data, Data Lakes and Data Swamps, How to gauge your company's Big Data readiness....

Extending Contact Center Capabilities Across the Insurance Enterprise

Today advancements in technology are making a big impact on business and society. To yield...

Drug and Alcohol Testing Requirements

In this two-part series, NBIS Risk Management team will break down the requirements to assist...

Personal Lines Pro eNewsletter

Critical insights into the personal auto, homeowners, and other consumer insurance markets to help P&C professionals stay informed – FREE! Sign Up Now!

Advertisement. Closing in 15 seconds.