This content is from: Innovation
Rate Softening Will Hit U.S. Personal Lines Profits In 2006, Plus Other News
U.S. personal lines writers learned some valuable lessons from the four windstorms that struck Florida in 2004 – in time for the 2005 hurricane season.
• U.S. personal lines writers learned some valuable lessons from the four windstorms that struck Florida in 2004 – in time for the 2005 hurricane season.
Rating agency AM Best says they held out for better rates, not expecting the favorable loss cost trends in lines such as private passenger motor to continue. Rival agency Standard & Poor's adds that they protected themselves from insolvency by launching enterprise risk management programmes, managing their aggregates better, and tightening up terms and conditions.
As a result, says AM Best, the personal lines combined ratio for the first nine months of 2005 was 97.6%, only moderately higher than the combined ratio of 95.7% for the same period in 2004. Insured property losses from catastrophes totalled $56.8 billion in 2005, compared with $27.3 billion in 2004, according to the U.S. Insurance Services Office's Property Claims Services unit.
Personal lines writers must maintain this underwriting discipline in 2006, says S&P. The abundance of opportunistic capital providers in the market, combined with insureds hunting for a bargain on renewal, could lead to rapid rate deterioration.
"Insurers will need to continue their prudent underwriting practices as rates soften and competition intensifies," said S&P in a report. AM Best agrees. It believes carriers have anticipated this and are "attempting to grow policies through improved pricing segmentation and increased advertising".
Both agencies point out, however, that the price softening in 2006 may reduce of its own accord – particularly in coastal homeowners' business – as carriers are forced to pass increasing reinsurance costs onto insureds.
The outlook on the commercial lines industry is not rosy, either. This is despite the market absorbing hurricane-related losses far easier than personal lines and reinsurance writers. Commercial lines writers were able to absorb these losses because of rate increases introduced during the hard market.
Not only did commercial lines writers suffer big losses in property, energy and business interruption classes during the second half of 2005, but casualty lines are already experiencing rate reduction in commercial motor, general liability and workers' compensation business.
To make matters worse, AM Best believes the reserve charges that many firms booked in the fourth quarter of 2005 for casualty business written between 1997 and 2001 may be insufficient. "AM Best believes that carriers are optimistically recognising redundancies from these accident years, given the long-tailed nature of casualty claims," the agency says in a report. The industry faces a loss reserve redundancy of about $7 billion as of Sept. 30, according to the rating agency.
S&P predicts a combined ratio of about 105% in 2005 for the commercial lines property/casualty industry, compared with 102.3% in 2004.
• U.S. insurer Allstate has been ordered to use $84 million collected from Florida homeowners to buy reinsurance or return it to policyholders in the state. The money comes from a rate increase filed last July, which Florida's insurance commissioner says was too high.
• Trident II and related entities have agreed to sell 3.15 million of Axis Capital's common shares. Banc of America Securities will be the underwriter in the offering.
• The U.S. House of Representatives has approved a bill to raise the borrowing authority of the U.S. National Flood Insurance Program to $21.2 billion from $18.5 billion. The flood program covers more than 4.7 million policies for homes and businesses.
• Arch Capital has mad a net profit of $257 million for 2005, down from $317 million in 2004. It made a net profit of $101 million in the fourth quarter of 2005, down from $107 million in the same period in 2004.
• German reinsurer Hannover Re has transferred €100 million ($119 million) of life insurance risk into the capital markets. The securitization covers individual unit-linked policies from Germany and Austria. The transaction – called L6 – follows five life transactions in the late 1990s and early 2000s.
• Bermudian life reinsurer Scottish Re made a net profit of $125 million in 2005, up from $71 million in 2004. Its fourth-quarter net income was $59 million, compared with $21 million in the same period of 2004.
• Bermudian reinsurer Montpelier Remade a net loss of $753 million for 2005, compared with a net profit of $240 million in 2004. The company made a net loss of $61 million in the fourth quarter of 2005, compared with a net profit of $102 million in the same period of 2004. The fourth quarter loss included $69 million of net losses from Hurricane Wilma.
• Aspen Insurance Holdings made a net loss of $178 million in 2005, compared with a net profit of $195 million in 2004. It made a net profit of $30 million in the fourth quarter, down from $72 million in the same period of 2004.
• Rating agency Fitch has upgraded the financial strength rating of FM Global to AA from AA-. The agency says the upgrade reflects FM Global's strong competitive position in the market for highly-protected risks, its engineering and underwriting expertise, and its solid capital base.
Rating agency AM Best says they held out for better rates, not expecting the favorable loss cost trends in lines such as private passenger motor to continue. Rival agency Standard & Poor's adds that they protected themselves from insolvency by launching enterprise risk management programmes, managing their aggregates better, and tightening up terms and conditions.
As a result, says AM Best, the personal lines combined ratio for the first nine months of 2005 was 97.6%, only moderately higher than the combined ratio of 95.7% for the same period in 2004. Insured property losses from catastrophes totalled $56.8 billion in 2005, compared with $27.3 billion in 2004, according to the U.S. Insurance Services Office's Property Claims Services unit.
Personal lines writers must maintain this underwriting discipline in 2006, says S&P. The abundance of opportunistic capital providers in the market, combined with insureds hunting for a bargain on renewal, could lead to rapid rate deterioration.
"Insurers will need to continue their prudent underwriting practices as rates soften and competition intensifies," said S&P in a report. AM Best agrees. It believes carriers have anticipated this and are "attempting to grow policies through improved pricing segmentation and increased advertising".
Both agencies point out, however, that the price softening in 2006 may reduce of its own accord – particularly in coastal homeowners' business – as carriers are forced to pass increasing reinsurance costs onto insureds.
The outlook on the commercial lines industry is not rosy, either. This is despite the market absorbing hurricane-related losses far easier than personal lines and reinsurance writers. Commercial lines writers were able to absorb these losses because of rate increases introduced during the hard market.
Not only did commercial lines writers suffer big losses in property, energy and business interruption classes during the second half of 2005, but casualty lines are already experiencing rate reduction in commercial motor, general liability and workers' compensation business.
To make matters worse, AM Best believes the reserve charges that many firms booked in the fourth quarter of 2005 for casualty business written between 1997 and 2001 may be insufficient. "AM Best believes that carriers are optimistically recognising redundancies from these accident years, given the long-tailed nature of casualty claims," the agency says in a report. The industry faces a loss reserve redundancy of about $7 billion as of Sept. 30, according to the rating agency.
S&P predicts a combined ratio of about 105% in 2005 for the commercial lines property/casualty industry, compared with 102.3% in 2004.
• U.S. insurer Allstate has been ordered to use $84 million collected from Florida homeowners to buy reinsurance or return it to policyholders in the state. The money comes from a rate increase filed last July, which Florida's insurance commissioner says was too high.
• Trident II and related entities have agreed to sell 3.15 million of Axis Capital's common shares. Banc of America Securities will be the underwriter in the offering.
• The U.S. House of Representatives has approved a bill to raise the borrowing authority of the U.S. National Flood Insurance Program to $21.2 billion from $18.5 billion. The flood program covers more than 4.7 million policies for homes and businesses.
• Arch Capital has mad a net profit of $257 million for 2005, down from $317 million in 2004. It made a net profit of $101 million in the fourth quarter of 2005, down from $107 million in the same period in 2004.
• German reinsurer Hannover Re has transferred €100 million ($119 million) of life insurance risk into the capital markets. The securitization covers individual unit-linked policies from Germany and Austria. The transaction – called L6 – follows five life transactions in the late 1990s and early 2000s.
• Bermudian life reinsurer Scottish Re made a net profit of $125 million in 2005, up from $71 million in 2004. Its fourth-quarter net income was $59 million, compared with $21 million in the same period of 2004.
• Bermudian reinsurer Montpelier Remade a net loss of $753 million for 2005, compared with a net profit of $240 million in 2004. The company made a net loss of $61 million in the fourth quarter of 2005, compared with a net profit of $102 million in the same period of 2004. The fourth quarter loss included $69 million of net losses from Hurricane Wilma.
• Aspen Insurance Holdings made a net loss of $178 million in 2005, compared with a net profit of $195 million in 2004. It made a net profit of $30 million in the fourth quarter, down from $72 million in the same period of 2004.
• Rating agency Fitch has upgraded the financial strength rating of FM Global to AA from AA-. The agency says the upgrade reflects FM Global's strong competitive position in the market for highly-protected risks, its engineering and underwriting expertise, and its solid capital base.