Friday, March 23, 2012

Insurers’ Capital Position has Stable Outlook

In the new 2012 outlook report, Fitch Ratings has observed that most P/C insurers’ capital positions are strong enough to manage through significant future adversity.

Fitch Ratings agency issued a “Stable” outlook for the insurance industry.

The report predicts that as premium growth and pricing continues to improve, underwriting and industry profits would boost in 2012.

Through several market surveys and company earnings discussion commentary, it has been revealed that there has been a recent shift in market pricing due to recent expansion of underwriting losses.
The report noted that this positive momentum in premium rates movement is still at an early stage, but market competition remains ferocious.

The extent of capital destruction required to shift market behavior toward the next hard market is still uncertain. According to recent market pricing information by Advisen’s ADVx Pricing Index and company management discussions in earnings conference calls reveal a slight increase and stabilization in pricing.
Though the overall performance seems to be improving, 2012 would still have a lot of underwriting loss for the industry.

Fitch forecasts that the P/C market is still going to experience underwriting losses. It is expecting a combined ratio of around 103 percent and industry return on surplus of 5 percent in the coming year. For the near future, returns on capital are likely to linger in the mid-single digits.

Fitch predicts that in the long run, capital depleting losses such as catastrophes, investment market declines, or unfavorable reserve action, would reset the industry to a negative outlook. Further deterioration in underwriting without proper calculations of a future pricing turnaround would also definitely lead to a negative outlook shift.

Furthermore, based on differences in recent results and important crucial pricing trends, the commercial lines sector is also more susceptible to the negative outlook when compared to personal lines.
Fitch anticipates that favorable reserve development from previous years would be much less helpful in underwriting results compared to last year. In fact, insurers have occasionally complained about reserve deficiencies in certain product lines, especially longer tail risks, such as casualty, workers’ comp, and asbestos reserves.

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