KBW Outlook: P&C Rate Increases Will Continue

Premium increases will continue for the P&C insurance industry in the face of rising interest rates and other economic factors that will conspire to keep the momentum going, says financial analyst Keefe, Bruyette & Woods.

In its preview of the P&C industry's Q2 earning season, KBW says the industry will be impacted by three financial realities—rising interest rates; the sustainability of rising premium rates, and catastrophe losses.

KBW points out that across the spectrum of commercial lines, rates have steadily risen. The question is whether the rise in investment yields increase rate competition. Probably not, says KBW.

The rise in interest rates would coincide with an increase in inflation. Even if there is an initial softening, deteriorating reserves and loss cost-driven margin pressure should accelerate rate increase, the analyst says. Homeowners insurance rates will continue to see robust increases while personal auto rates could decrease due to competition from Progressive and Allstate seeking to increase their policy counts.

On the catastrophe front, KBW says it is adjusting its loss assumptions, expecting higher catastrophe losses. International catastrophe events should weigh on reinsurers earnings, the report says, as U.S. storm counts were up 8 percent in Q2 on a year over year basis. However, the storm count is down 31 percent when compared to the 12 year average.

Among the companies KBW highlights in its Outperform rating are Axis and XL group for improving their core loss ratios. Among the five publicly traded insurance brokerage firms KBW expects Aon plc, Arthur J. Gallagher & Co. and Brown & Brown Inc. to outperform.