Although commercial-lines pricing is expected to continue its upward trend, ratings agency A.M. Best is maintaining a negative outlook on the sector due to weak macroeconomics, less-favorable loss-reserve development and low investment yields.
"As more and more commercial lines insurers are demonstrating their ability to achieve rate increase, premium growth in commercial lines appears sustainable," says A.M. Best in its latest property and casualty Review & Preview. "The question is to what degree? While pricing trends are encouraging, A.M. Best believes commercial insurers still have a way to go before they can declare this a hard market."
The ratings agency notes that a negative outlook means that it expects the vast majority of rating actions during the year to be affirmations, but negative rating actions will outnumber positive ones.
Further outlining the challenges for the sector, A.M. Best says, "As the economy slowly recovers, insurers continue to face many of the same challenges brought on by the financial crisis," when "billions of dollars in insurable risks" evaporated beginning in late 2008.
Sluggish economic growth and high unemployment in sectors critical to commercial insurers, such as construction, will continue to impact growth in 2012, A.M. Best says. "In essence," says the analysis, "any new commercial lines growth prospects will have to come from rate increases as new business opportunities are likely to be neutralized by the slow-growth economy."
The positive news for commercial-lines insurers is that A.M. Best believes insurers will in fact continue to achieve rate increases, but those increases are expected to be incremental and perhaps diminish some compared to 2012. "Barring a major catastrophe, A.M. Best believes commercial-lines pricing in 2013 will continue to improve, but will moderate slightly compared with the rate increases garnered in 2012," the analysis says. "A.M. Best believes price moderation has already taken place and will likely be prompted by competitive pressures and an abundance of capital."
A.M. Best also says that difficult investment constraints add to insurers' woes, and "it would appear as though a number of insurers are still in need of additional rate just to achieve a return on equity (ROE) hurdle rate that would be considered satisfactory to stakeholders. No longer is a break-even combined ratio acceptable based on today's standards. As a result, many commercial insurers will continue to be tested in 2013."
Commercial property and workers' compensation should see the steepest rate increases, says A.M. Best.
The analysis also notes that loss-reserve takedowns could further strain insurers' balance sheets. "In 2012, commercial-lines reserves developed favorably, equating to 3.2 points on the segment's combined ratio. A.M. Best believes that, in time, commercial insurers will no longer have the ability to release prior-year loss reserves, which insurers have used in recent years to mask results."
Reserve redundancies should continue into 2013, the ratings agency says, but not long beyond that.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.