Property/casualty insurers in the United States have reported increased profitability through nine months of 2015 but are facing serious challenges ahead—many of which are evident in a press release and report on insurer results that we published with the Property Casualty Insurers Association of America (PCI).
On the one hand, insurers’ net income and profitability continue to grow. Their net income after taxes grew to $44.0 billion in the first nine months of 2015 from $37.8 billion in nine-months 2014. Their overall profitability as measured by their rate of return on average policyholders’ surplus also rose—to 8.8 percent in nine-months 2015 from 7.6 percent in nine-months 2014.
On the other hand, insurers continued to face a difficult investment environment. Their annualized investment yield during the first nine months of 2015 was just 3.1 percent, compared with an average of 5.1 percent from 1960 to 2014. That yield is unlikely to improve anytime soon.
Nevertheless, insurers have seen strong results recently in an uncertain economic environment. Consider the following observations from our report:
Combined ratio, net underwriting gains, and net written premium growth improved: Insurers’ combined ratio—a key measure of losses and other underwriting expenses per dollar of premium—improved to 96.9 percent for nine-months 2015 from 97.7 percent for nine-months 2014. At the same time, net underwriting gains increased to $7.1 billion from $4.2 billion, and net written premium growth increased to 4.1 percent from 4.0 percent.
Earned premium growth exceeded increase in losses and loss adjustment expenses (LLAE): The improvement in underwriting results is mainly due to the growth in earned premiums in excess of the growth in LLAE. In nine-months 2015, earned premiums grew 3.9 percent to $376.8 billion, while LLAE rose just 2.7 percent to $260.0 billion, other underwriting expenses grew 4.3 percent to $108.4 billion, and policyholders’ dividends rose 6.5 percent to $1.3 billion. As a result, net underwriting gains increased to $7.1 billion from $4.2 billion in nine-months 2014. Notably, the decrease in catastrophe losses helped to suppress overall LLAE growth: direct insured property losses from catastrophes striking the United States totaled $13.0 billion in nine-months 2015, down $1.7 billion from $14.8 billion in nine-months 2014 and $1.9 billion below the $14.9 billion average for the past ten years.
The question is whether the underwriting gains will continue.Over the last three years, insurers’ underwriting discipline, helped by a decline in catastrophic losses, has produced eight (out of twelve) quarters of underwriting gains. That is what insurers need in the times when the investment income is low. Historically, such underwriting performance was rarely attained—since the beginning of ISO’s quarterly records in 1986, insurers saw underwriting gains in only 17 of 108 quarters through year-end 2012.
But what if the insurance industry relaxes its underwriting discipline? Or what happens when the catastrophe losses return to more typical levels? Those underwriting gains could evaporate.
The reality is that to succeed in any line of business today insurers need the tools to make the best possible underwriting decisions. At ISO, we’re working hard to develop products that serve, add value, and innovate for insurers. ISO Risk Analyzer® is a suite of predictive models that help carriers classify, segment, and price their insurance risks. These tools examine hundreds of indicators and predict expected losses at the policy level by major coverage or peril. It’s currently available for the following lines: homeowners, personal auto, commercial auto, and businessowners.
We’re also developing other products and services to help insurers manage risks. Learn more by visiting and subscribing to our Between the Lines newsletter. Also stay tuned for a number of events this year where ISO professionals will be speaking about emerging issues in insurance and will be available to meet with you.
If you have any questions, please feel free to contact me at Beth.Fitzgerald@verisk.com or 201-469-2822.