NU Online News Service, May 3, 3:12 p.m. EDT

A near-term pricing shift for commercial lines is unlikely, and recent deterioration in underwriting results has led to a decline in premium revenues unseen since the 1930s, according to a recent Fitch Ratings report.

The report, “Commercial Lines Underwriting Results,” found weakening underwriting results through 2010. “The commercial-lines industry aggregate accident-year combined ratio for 2010 was 103.8,” the report notes, “which corresponds with an estimated return on surplus of approximately 4.5 percent.”

Commercial Lines Industry Aggregate Fitch adds that the commercial-lines combined ratio has increased by nearly 20 points since 2006. “This decline in underwriting performance is related largely to the cumulative effect of continued premium-rate reductions in commercial lines, as well as adverse effects on insured exposure levels and demand for coverage from the economic recession,” Fitch states. “These conditions have led to a decline in premium revenues unseen in the insurance market since the 1930s, which contribute to higher loss and underwriting expense ratio.”

Workers' compensation saw the most severe underwriting losses, the report notes, with a combined ratio of 113.3. “While the workers' compensation line benefited from reform efforts in various states and continued declines in claims frequency, claims severity in this segment has steadily trended upward,” Fitch notes. The rating agency adds that revenue was hurt by exposure declines as employment levels and payrolls fell during the recession.

Commercial auto has also seen significant exposure reductions and posted a combined ratio of 103.2 in 2010, Fitch says. Commercial multiperil had a combined ratio of 106.7 for accident-year 2010.

In the face of the poor underwriting results, though, Fitch does not expect an imminent turn in pricing, as capacity remains strong “evidenced by continued growth in industry capital to record levels in 2010.” Fitch adds, “Also, past industry cycles reveal that underwriting performance has declined to considerably worse levels before any material pricing shift ensues.”

Fitch says it is maintaining a stable ratings outlook for U.S. commercial lines due to the favorable capital position of most insurers, “coupled with recognition that in the soft market phase of a 'normal' market cycle, returns on capital will run below the cost of capital and long-run industry averages.”

Special Reports /

Fitch 2010 Review: Deteriorating Underwriting Results; No Pricing Change

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