Insurance Rates Rising, But Profitability Elusive

After suffering through a year of elevated property losses and poor underwriting results in 2011, U.S. commercial-lines insurers are positioned to deliver improved operating results this year—but carriers will still struggle to reach previous profit marks, one analyst says.

Recent reports also indicate that insurers should continue to see rising prices and hardening market conditions, with risks beginning to move from the standard market back to the surplus-lines space.

Fitch Ratings insurance analyst James B. Auden says increasing commercial-insurance rates and premium-volume growth will contribute to better underwriting performance in 2012.

However, he says loss-reserve deterioration and weak investment performance will impede a restoration of prior-hard-market levels of industry returns on capital.

Auden argues that rates need to rise considerably more than they’re expected to for commercial lines to return to underwriting profitability and solid returns on capital. He also says profitability will be challenged because market-underwriting capacity was not materially affected by 2011 loss events.

As a result, he says, recent rate increases have been driven more by a reaction to losses than a real shift in competitive fundamentals.

But rates are expected to continue their upward trend, according to Stifel Nicolaus analyst Meyer Shields. The direct-written-premium results and direct-loss-ratio results of 2011, he says, will lead to increased rates in both personal and commercial lines.

As a further sign the insurance-pricing cycle is shifting, Moody’s Investors Service says some companies are reporting strong growth in excess and surplus-lines business, generally a sign that standard-market carriers are tightening underwriting and shedding business.

Moody’s adds that pricing surveys and conference calls show that pricing has “passed an inflection point,” and most commercial-lines insurers are reporting rate increases “that they believe to be in excess of their loss trends.”  

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