A.M. Best says it is maintaining its negative outlook on Commercial Lines for 2016
A.M. Best overall negative outlook on the U.S. P&C commercial lines segment will continue in 2016. The rating agency announced its negative outlook expectations in it recent Best’s Briefing entitled, “Commercial Lines Outlook Remains Negative as Margins Remain Under Pressure; Personal Lines Remains Stable.”
The negative outlook is the result of A.M. Best’s expectations of more downgrade throughout the year. As for the personal lines segment, the rating agency says that its stable outlook on this segment of the P/C industry will continue.
The negative outlook reflects same concerns prevalent over the past few years says Best
Continued moderation and declines in commercial lines pricing as well as the potential for adverse loss reserve development and low investment yields are the main factors for the negative outlook adds the rating agency.
A.M. Best believes core accident-year margins for commercial lines will continue to be pressured as rate increases moderate, and in some lines, actually decline. A material line in this sector, commercial automobile, is expected to continue experiencing rate increases in 2016 amid a positive accident-year trend; however, adverse development in the line has wiped away any benefit recognized from these increases.
Majority of rating actions will be affirmations this year
A.M. Best notes that commercial lines insurers’ balance sheets and capitalization levels have remained strong even in the face of moderately underfunded reserves. As a result, it predicts that the vast majority of rating actions this year will be affirmations. The rating agency cautions, however, that those insurers lacking the underwriting culture “…to produce sustainable, favorable earnings as the downward part of the cycle continues will be susceptible to downgrades.”
Stable outlook for personal lines sector will likely continue throughout 2016
As for the personal lines sector, company-specific issues vis-a-vis overarching market trends will be the driving force for rating actions this year.
The year-over-year consistency of the automobile line, which composes the majority of premiums in the segment, continues to drive earnings. Pricing sophistication reflective of investments made by market leaders in multivariate pricing models has enabled insurers to analyze large amounts of data, segment their books of business and quickly recognize trends.
In addition, the rating agency cites the lower rate of catastrophic weather events in recent years as an additional benefit for this segment, in particular, the lack of large-scale catastrophic events, such as hurricanes or earthquakes. Property losses have also contributed positively to this segment with the vast amount of losses resulting from smaller scale loss events, such as harsh winter weather and tornado/hail and thunderstorms. But, cautions A.M. Best, the strong capitalization of the personal lines segment is not a ticket to rest for insurers. “Companies that have not actively invested in improving their pricing sophistication, efficiency and risk management are at a competitive disadvantage and will not be relevant in the long term,” warns the rating agency.
Insurers close out 2015 with further rate reductions says MarketScout
December 2015 saw the U.S. P/C Composite rate down four percent (4%) says MarketScout. Each month, MarketScout analyzes pricing surveys conducted by The National Alliance for Insurance Education and Research in order to provide a snapshot of the personal and commercial lines rate trends. CEO Richard Kerr of Dallas-based MarketScout, says the company has been tracking the monthly trends of both the U.S. Personal and Commercial lines marketplace since 2001 and says that in comparison with 2002 and 2007, and believes the current environment is currently “benign” in comparison with years past.
Market cycles are part of our life, be it insurance, real estate, interest rates or the price of oil. Market cycles are going to occur without question. The only questions are when, how much and how long. While it may seem the insurance industry has already been in a prolonged soft market cycle, we are only four months in. The market certainly feels like it has been soft for much longer, because rates bumped along at flat or plus 1 to 1½ percent from July 2014 to September 2015. The technical trigger of a soft market occurs when the composite rate drops below par for three consecutive months.”
Continuing he notes that, “It seems the length and veracity of the market cycles has become less volatile in the last five or six years. Thus, the impact of a hard or soft market in today’s environment may be 5 or 6 percent up or down. Can you imagine how we would react today in a market such as that of July 2002 when the composite rate was up 32 percent? Or in December 2007 when the composite rate was down 16 percent? Underwriters today have better tools to price their products and forecast losses. Further, the chances of a rogue underwriter or company are greatly reduced by the industries’ checks and balances. There may be less excitement but there are probably far fewer CEO heart attacks.”
The US Average P/C Rate Trend over the last 14 years
The following graph, courtesy of MarketScout, plots the average P/C rate trends for the U.S. marketplace over the last 14 years.
An in-depth look at the numbers
As of December 2015, rates by industry, which include coverage classification, property, umbrella, workers’ compensation, professional liability, fiduciary, and surety rates, were all more competitive than in November 2015 notes the MarketScout analysis. It also found that:
- As for account size, all accounts up to $1,000,000 in premium enjoyed rate reductions in December 2015, which were more aggressive than in November 2015. Jumbo accounts, or those over $1,000,000 in premium, were stable at a 4 percent reduction.
- By industry classification, rates in all industries were down more aggressively in December 2015 than in November 2015.
December 2015 Premium Rate Trends by Coverage Class
| By Coverage Class | December |
| Commercial Property | Down 2% |
| Business Interruption | Down 1% |
| BOP | Flat |
| Inland Marine | Down 1% |
| General Liability | Down 2% |
| Umbrella/Excess | Down 4% |
| Commercial Auto | Flat |
| Workers’ Compensation | Down 4% |
| Professional Liability | Down 2% |
| D&O Liability | Flat |
| EPLI | Flat |
| Fiduciary | Down 2% |
| Crime | Flat |
| Surety | Down 1% |
December 2015 numbers by Account Size
| By Account Size | December |
| Small Accounts (Up to $25,000) | Down 3% |
| Medium Accounts ($25,001 – $250,000) | Down 4% |
| Large Accounts ($250,001 – $1 million) | Down 5% |
| Jumbo Accounts (Over $1 million) | Down 4% |
December 2015 Numbers by Industry Class
| By Industry Class | December |
| Manufacturing | Down 3% |
| Contracting | Down 3% |
| Service | Down 3% |
| Habitational | Down 5% |
| Public Entity | Down 3% |
| Transportation | Down 2% |
| Energy | Down 4% |
