A recent report by Fitch Ratings suggests that the commercial insurance market is likely to worsen in performance this year. The anticipated decline follows three years of underwriting profit for the industry, with a combined ratio of roughly 94% for 2013, 2014, and 2015.
"Catastrophe losses below historical norms contributed to strong 2015 commercial market results; however, results will likely stumble in 2016 as industry competition heats up and premium rates are declining in a growing number of product segments," said Fitch managing director James Auden.
According to the report, the renewal rates for most commercial market segments were either static or declining following a hardened market from 2011 to 2014. The observed price competition is a result of underwriting success and market capacity expansion from earnings accumulation. Fitch posits that as price competition builds up, premium growth would be adversely affected.
Commercial lines written premium volume increased by a meager 1.8% in 2015.
Fitch observed that workers compensation, the largest commercial lines segment, has gradually improved over the past five years to generate considerable underwriting profit in 2015. The ratings agency, however, argued that the segment may have reached its cyclical peak, with later results deteriorating thanks to competitive pressure and the characteristic unpredictability of the business.
The report found that commercial automobile liability insurance remains the weakest performer of all the segments, posting a large 2015 underwriting loss and adverse loss reserve development due to claims severity concerns.
The ratings agency revealed that favorable loss reserve development from earlier underwriting periods fell in 2015, representing 2% of calendar year commercial lines earned premium. It was American International Group, Inc.'s significant fourth quarter reserve charge that affected this result.
"Commercial property results will greatly influence overall commercial market results for 2016, a reversion toward more severe catastrophe losses would lead to a sharper decline in 2016 performance," Auden appended.
