“Substantially deflated” P&C economic results in Q1: MSA

Report also has warnings for brokers, insurers regarding inconsistency in overland flood coverage

Severe weather events and a challenging auto insurance environment contributed to an underwhelming economic showing for the P&C industry in the first quarter (Q1) of 2017, according to MSA Research’s quarterly outlook report.

The industry overall produced zero underwriting income and top line growth of 1.9%. “Growth in reinsurance cessions outpaced growth in assumed premium yielding a drop in net written premium,” the report states. “This may be a result of higher reinsurance costs in a post-Fort McMurray year.”

The industry did benefit from investment income, which doubled year-over-year as a result of a capital markets bump following the election of U.S. President Donald Trump.

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A “big soggy mess” of a spring has contributed to the lackluster results. Although the report does not specify how much the rainy season specifically contributed to the industry’s quarterly results, it notes that the frequency and severity of flooding events are increasing. There have been 83 catastrophes and notable events in which flooding was a factor since 2008, which has cost almost $7 billion in total.

There are several problems connected to the severity of these events such as the inconsistent availability of overland flood coverage by insurers. “It is not offered by all (or even most) insurers yet and, when it is available, isn’t always being sufficiently sold on renewal. It isn’t typically available at all in high-risk zones,” the report states.

There are non-financial consequences for the industry. The inconsistency in this type of coverage may expose brokers to angry and litigious customers who experience financial loss following a flood and wonder why they were not offered the proper coverage, the report suggests.

“We would posit that in the current situation, the downside [public relations] risk to the insurance industry is higher now than it was during the 2013 Calgary floods given the inconsistent availability or take-up of flood coverages,” the report adds.

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The report also notes the high direct loss ratio of 82% connected to auto insurance results. “With the prolonged low interest rate environment grinding along (Trump bumps notwithstanding), insurers simply have to make underwriting profits with combined ratios in the 95-97% to justify their cost of capital and ultimately remain viable,” the report states.

The study looks at the results for individual segments of the industry. It finds that commercial insurance (excluding Lloyd’s) saw top line growth of 1% and a decline of 3.4% in net written premiums. Claims shot up by almost 12% yielding zero underwriting income. Commercial insurance’s results were helped by increased investment income.

Personal and multi-line writers saw virtually no top line growth, states the report. Net written premium volume declined by 3.6% and the combined ratio in Q1 2017 was 102.7%. Although its results were also helped by increased investment income, net income still dropped by 27%.

Reinsurers saw the steepest decline in net written premiums with a fall of 10.4%. Its combined ratio for the quarter landed at 101.2%. Reinsurance’s dependence on fixed income products meant it benefitted less from the “Trump bump.” Its net income declined by 52%.

 

 

 

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Transcontinental Media G.P.