As 2015 draws to a close, insurers are looking for indications of what the new year will bring.
At a panel discussion on the 2016 outlook for insurance companies held on Nov. 18, Moody’s analysts predicted that the Federal Reserve would gradually raise rates, beginning in December. Indeed, the Fed did just that, raising interest rates by 0.25% on Dec. 16, exactly seven years after the Federal Market Open Committee took the rate to 0% on Dec. 16, 2008.
What else do the analysts think is in store for property and casualty (P&C) insurers in 2016?
The outlook is stable for all insurers, except for global reinsurance, said the panel, led by Robert L. Riegel, managing director, Americas Insurance, for Moody’s. He doesn’t see a lot of rating upgrades or downgrades in the next year.
Riegel also noted that the outlook is stable for personal and commercial lines, with some margin pressure. “Rate increases are moderating,” he said, especially in commercial property but combined ratios are relatively stable.
M&A can be positive
Moody’s has a negative outlook for reinsurers because of reduced demand from primary companies and abundant capacity provided by alternative sources of capital. Stanislas Rouyer, associate managing director, Specialty Insurance for Moody’s, noted that reinsurance companies still have merger and acquisition (M&A) potential, although smaller companies may have a more difficult time getting traction. He sees definite consolidation in the industry coming.
When asked about M&A activity generally in the insurance industry, especially in light of recent large company deals, Riegel commented that Moody’s sees the Willis/Towers Watson merger as credit positive, and good for both companies. Willis was credit negative before, and is stable now, he added.
Riegel described the ACE/Chubb deal as “transformational” with some positive elements. What remains to be seen is the impact of the cultural differences in the two organizations. Chubb is more granular, he said, while ACE generally has larger limits.
Regarding the acquisition of U.S. insurers by Asian companies, Riegel pointed out that the buyers are generally privately held conglomerate groups that are looking to support growth. They’re not dominant players in the Asian insurance markets.
Buying into the U.S. insurance market is also a way to develop needed skills sets and have those skills flow back to Asia, Riegel said. This allows the foreign companies to improve the way they operate in their own markets.
Addressing the topic of interest rates, Joel Levine, associate managing director, Life Insurance Group, Moody’s, commented that “low for long” is generally negative for insurance companies but they’ve managed to operate well in the low interest environment. In his view, a possible stock market correction is likely to have a more serious impact. “Companies are building in assumptions of low for longer,” he said, “and they’re not taking huge charges or huge losses.”
The low-for-long interest rate scenario has less of an impact on Property insurance, Levine said. Casualty is more dependent, and there will be some profitability squeeze. The biggest benefit he sees is more underwriting discipline in the property and casualty (P&C) industry.
Cyber risk provides opportunity
Alan Murray, senior vice president, Property Casualty, Moody’s, noted that Cyber coverage presents growth opportunities for P&C carriers who are already in the market. “Specialty insurance usually grows out of the exclusions in general liability policies,” he added.
Given the lack of standardization among carriers, Murray sees the potential for customization based on a general template, especially for large organizations. For small to mid-size businesses, Murray suggested that agents and brokers consider the Cyber endorsements for use with the ISO Businessowners Program.
Murray also pointed out that insurers have their own operational risk. They gather and store sensitive data on commercial, institutional and individual clients. He expects that insurers will address cyber risks holistically as part of their own internal enterprise risk management. But a severe, prolonged disruption to a company’s business from a cyber attack may negatively impact an insurer’s rating or outlook, he cautioned.
Overall, 2016 looks to be a positive one for the insurance industry.
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Rosalie Donlon
Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].
