Rating and industry analysts at A.M. Best are maintaining their stable outlook for the personal lines property/casualty segment in 2007 based on what they see as this sector’s continued favorable risk-adjusted capitalization and ongoing operating profitability.
They estimate that the personal lines segment will report strong earnings and capital growth in 2006, driven by several factors, including favorable frequency and severity trends, modest catastrophic activity and the maintenance of pricing and underwriting discipline.
Performance in the personal lines segment continues to be driven by the automobile liability and physical damage lines, as combined they account for approximately 65 percent of net written premium for the personal lines composite. The combination of continually evolving pricing segmentation, avoidance of market-share based pricing decisions, declining frequency trends and modest increases in severity has enabled the segment to produce favorable results over the last several years, according to A.M. Best.
Although A.M. Best notes a slight increase in the underwriting expense ratio due to modest reductions in net written premium as well as increased overall marketing expenses, the rating expert figures that the impact has been more than offset by favorable loss trends.
Given the recent performance and heightened competition, the personal lines segment’s overall margins will be compressed modestly. A.M. Best predicts. However, with the strong profitability levels of recent years, the reductions are unlikely to have a considerable negative impact on the segment in the near term.
In the homeowners’ line, the generally modest catastrophe losses for the year coupled with ongoing underwriting and pricing discipline produced an “extremely strong” combined ratio, notes A.M. Best. Given the unprecedented catastrophic activity of 2004 and 2005, carriers continued to re-assess their risk tolerances during 2006.
“Extensive initiatives were put in place with regards to managing exposure and gaining a better understanding of the risks at hand as well as the appropriate premium for those risks,” the firm adds.
Despite the modest catastrophic activity of 2006, A.M. Best anticipates that carriers will continue to be diligent in their efforts regarding risk management.
The regulatory environment remains “an important consideration in any assessment of the segment, as personal lines continues to be the most heavily regulated in the industry,” the analysts note, citing law changes implemented within the Florida market recently. “Although the impact on the overall segment is estimated to be modest, these recent events highlight the importance of managing all risk components,” the firm advises.
While A.M. Best says it expects deterioration in pricing and earnings given the increased competitive environment, it also believes it is likely that the overall impact, assuming a normal catastrophe year, will be modest in 2007. “Companies that succeed in this market will be those that maintain a focus on risk management and underwriting discipline across all facets of the business while being mindful of market conditions to avoid adverse selection,” A.M. Best reports.
Source: A.M. Best
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