Stability ahead in P&C insurance amid hardening rate cycle

Concerns about loss emergence is driving the U.S. P&C industry 'to find religion once again on pricing,' says S&P.

“To harden rates, there has to be an impetus, and in this case, the industry points to ‘social inflation,’ not replenishment of capital,” said Tracy Dolin, credit analyst at S&P Global Ratings. (Photo: Shutterstock”To harden rates, there has to be an impetus, and in this case, the industry points to ‘social inflation,’ not replenishment of capital,” said Tracy Dolin, credit analyst at S&P Global Ratings. (Photo: Shutterstock)

The P&C insurance industry is once again motivated to “find religion” on pricing thanks to mounting concerns about loss emergence, says a new S&P Global Ratings report.

The industry’s new-found drive comes amidst a loss-cost driven hardening rate cycle, says the “The Outlook On The U.S. Property/Casualty Insurance Sector Remains Stable; ‘Social Inflation’ Puts A Spotlight On Pricing Complacency” report. With market capital recently reaching record highs, the current cycle is in contrast to previous years when rate cycles were driven by capital-replenishment, explains S&P. Yet, despite ample capital, “P&C insurers are still demonstrating restraint by withdrawing underwriting capacity in underperforming business lines, raising attachment points, and reducing limits and asymmetrical re-pricing efforts where it is needed the most,” the report notes.

The industry’s shrewd strategy with capital coupled with effective enterprise risk management programs supports S&P’s predictions of a continued stable U.S. P&C insurance market this year.

Pricing complacency

In recent years, S&P has marked the P&C sector as being complacent with pricing. Although price increases in some lines of business can be traced back to 2018, albeit categorized as “subpar” and ”bleak market correction,” it was in 2019 when pricing momentum significantly accelerated. On a composite basis, pricing increases reached 6%, with some lines experiencing double-digit rises in price, notes the report.

While past complacency can arguably be the stimulus behind the current hardening cycle, S&P sees another factor driving activity: “To harden rates, there has to be an impetus, and in this case, the industry points to ‘social inflation,’ not replenishment of capital,” Tracy Dolin, S&P Global Ratings credit analyst, said in a release. “Pricing complacency may be the more immediate yet less palatable impetus for this hardening pricing cycle, one that we believe will continue to play out into 2020.”

Pricing expectations in 2020

After prices remained “too low for too long in many product lines,” things started to change considerably in 2019, according to S&P. Specifically, commercial auto, large account property, financial, and professional lines experienced increases as a result of “long-overdue pricing corrections.”

As such, S&P is optimistic about the continuation of rate increases in 2020 and predicts the following numerical price increases in commercial lines:

To read more findings in the “The Outlook On The U.S. Property/Casualty Insurance Sector Remains Stable; ’Social Inflation’ Puts A Spotlight On Pricing Complacency” report, visit the S&P website.

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