Underwriting performance is presented, as well as the state of insured catastrophe losses, claim trends in private passenger insurance, a look at economic and demographic considerations and growth drivers in Personal lines, a M&A update and the effect of wealth and credit in the marketplace.

Related: 10 trends to affect the insurance marketplace in 2016

The report closes with some thoughts on industry disruptors such as driverless cars, the on-demand economy, the Internet of Things and finally, the status of recent attacks on the industry concerning price optimization.

The following slides from Hartwig's report highlight 23 of the key personal lines insurance issues for 2016, and beyond: 

Return on equity (ROE) for property and casualty insurance by major event (1987-2015E)

P&C profitability is both by cyclicality and ordinary volatility.

Property and casualty net income after taxes (1991-2015, Q3 estimate)

Net income fell modestly (-12.5%) in 2014 vs. 2013.

Investments: The new reality

Investment performance is a key driver of profitability. Depressed yields will necessarily influence underwriting and pricing.

Property and casualty insurer portfolio yields (2002-2015, Q3)

P&C carrier yields have been falling for over a decade, reflecting the long downtrend in prevailing interest rates. Even as prevailing rates rise in the next few years, portfolio yields are unlikely to rise quickly, since low yields of recent years are "baked in" to future returns.

Property and casualty insurance industry investment gain (1994-2015, Q3)

Total investment gains were down slightly in 2014, as low interest rates pressured investment income, but realized capital gains remained robust.

Investment gains in 2015 will be similar to those earned in 2014, but still well below the pre-crisis highs.

Reduction in combined ratio necessary to offset 1% decline in investment yield to maintain constant return on equity, by line

Lower investment earnings place a greater burden on underwriting and pricing discipline.

Profitability and politics

How is profitability affected by the president's political party?

Property and casualty insurance industry return on equity by presidential administration (1950-2014)

The political party of the U.S. president has marginal bearing on the profitability of the property and casualty insurance industry.

Top insurance issues: What's hot, what's not

Technology spiked, catastrophes crashed. Attacks on pricing methodologies and underwriting criteria increased. 

I.I.I. media index for property and casualty, 2014 vs 2015 (percent increase/decrease from previous year)

Interest in technology issues impacting the insurance industry are surging; the trend will continue in 2016.

Coverage of catastrophe issues plunged (except for riots and wildfires).

Personal lines profitability

Profitability of Auto and Homeowners lines varies tremendously over time and across states.

Return on net worth for all property and casualty personal lines (2005-2014 average)

Commercial lines have tended to be more profitable than personal lines over the past decade, but Homeowners is on the rise due to the dearth of major catastrophes in recent years.

Return on net worth for all P&C lines vs. Homeowners and Private Passage Auto (1990-2014)

Private Passenger Auto has consistently outperformed the property and casualty industry as a whole. Homeowners volatility is associated primarily with coastal exposure issues.

Insured catastrophe losses

2013-2014 and YTD 2015 experience below average CAT activity after very high CAT losses in 2011-2012. Winter storm losses were far above average in 2014 and 2015.

U.S. insured catastrophe losses

The years 2013-2014 were welcome respites from 2011-2012, which were among the costliest years for insured disaster losses in U.S. history. The longer-term trend is for more — not fewer — costly events.

2012 was the third most expensive year ever for insured CAT losses. 

Through December 31, 2015, there was an estimated $15 billion in insured CAT losses for the year.

Inflation-adjusted U.S. catastrophe losses by cause of loss (1995-2014)

Insured CAT losses from 1995-2014 totaled $395.6 billion, an average of $19.8 billion per year, or $1.65 billion per month.

Wind losses by far cause the most catastrophe losses, even if hurricanes/tropical storms are excluded.

Tornado share of CAT losses is rising.

Winter storm losses were much above average in 2014-2015. 

Number of NFIP policies in force at year-end (1980-2015)

The number of National Flood Insurance Program policies in force has plunged by 549,000 or 9.6% since 2009, even as coastal development surges and sea levels rise.

Claim trends in private passenger Auto insurance

There are rising frequencies and severities in many Auto coverages. Will that pattern be sustained?

Auto severity and frequency by coverage: Trending up in 2015

The severity and frequency of Auto claims were up across most coverage types in 2015; a trend that is likely to continue in 2016.

Death rates per 100 million vehicle miles (1990-2015) 

Vehicle death rates fell by nearly half between 1990 and 2010. The recession and high gas prices reduced miles driven, accelerating the drop in death rates.

Motor vehicle fatality rates appear to be ticking up in 2015.

Auto property damage liability: Severity and frequency are up 

The severity and frequency trends for Auto property damage liability have been volatile, but rising in severity since 20011, is a concern.

Auto comprehensive coverage: Severity trends are unfavorable

Weather creates volatility for Auto comprehensive coverage. Severe weather is a principal cause of the spikes in both frequency and severity.

Auto insurance claim cost for drivers continue to grow faster than CPI

Healthcare costs are a major cost for drivers and are expected to accelerate in the years ahead.

Personal lines growth analysis

Growth trajectories differ substantially by state and over time.

Auto and Home vs. all lines, net written premium growth (2000-2018F)

While Homeowners insurance has grown faster than Auto for many years, Auto is generally more profitable, though not recently.

Private Passenger Auto insurance net written premium (2000-2017F) 

Private Passenger Auto premiums written continue to recover from a period of flat growth, attributable to the weak economy impacting new vehicle sales, car choice and increased price sensitivity among consumers.

Private Passenger Auto net written premium volume in 2014 was up $26.3 billion or 16.7% since the 2009 trough. By 2017, the gain is expected to be $46.8 billion or 29.7%.

Private Passenger Auto will generate $6-$8 billion in new premiums annually, through 2017.

Homeowners insurance net written premium (2000-2016F)

Homeowners insurance net written premium continues to rise (up 150% from 2000-2015F), despite very little unit growth during the real estate crash. Reasons include:

• rate increases, especially in coastal zones;
• ITV endorsements (e.g., "inflations guards") that are compulsory for mortgaged properties; and
• the resumption of home building activity.

The Homeowners line will generate about $4 billion in new premiums annually, through 2016.

Personal lines growth drivers

Rate and exposure are both presently important growth drivers.

Average expenditures on Auto insurance (1994-2015E)  

Across the U.S., Auto insurance expenditures fell by 0.8% in 2008 and 0.5% in 2009, but rose 0.5% in 2010, 0.8% in 2011, 2.3% in 2012 and 3.3% in 2013. The I.I.I. estimate is +3.4% in 2014 and 2015.

The average expenditure on Auto insurance now finally exceeds the pre-crisis high of $842 recorded in 2004, taking a full decade to recover, but on an inflation-adjusted basis, premiums are still below 2004 levels.

Related: 19 personal lines growth and profit leaders

M&A update: A path to growth?

Are capital accumulation, drive for growth and scale stimulating M&A activity?

U.S. insurance mergers and acquisitions, P&C sector (1994-2015E) 

M&A activity in the property and casualty sector was up sharply in 2015, and will likely reach its highest level since 1998. 

Related: Agency mergers and acquisitions hit record high in 2015

The Internet of Things and the insurance industry

The Internet of Things will create trillions in economic value throughout the global economy by 2025.

• What opportunities and challenges will this create for insurers?
• What are the impact on the insurance industry of the "value chain?"

The insurance industry value chain is changing for many reasons.

• Who owns the data?
• Where does it flow?
• Who does the analytics?
• Who is the capital provider?

For a look at the complete report, visit "Trends, Challenges and Opportunities in Personal Lines Insurance: 2016 and Beyond."

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