A.M. Best: Commercial P/C Outlook Stable Despite Price Competition

March 5, 2007

A.M. Best Co. has completed its assessment of the U.S. commercial market and revised the outlook to stable from negative for 2007. Although A.M. Best says there continues to be evidence of pricing deterioration, the level of deterioration thus far has been gradual as irrational pricing has yet to surface.

The outlook change also considers the level of rate adequacy in the sector, the record underwriting profits recorded in 2006 and an expectation of stabilized reserve development over the near term.

A.M. Best anticipates that there will be few rating upgrades or positive rating outlooks assigned in 2007 as most commercial lines companies will need to demonstrate their so-called underwriting discipline through the next soft market, which A.M. Best believes is inevitable.

Through 2006, A.M. Best believes that many U.S. commercial lines insurers were the recipients of much improved pricing, proving the old adage, “a rising tide lifts all boats.” With the beginning of a new soft cycle now underway, however, many companies will be put to the test in proving their underwriting discipline, according to the rating organization.

Over the near term, A.M. Best says price discipline remains rational. It is over the longer term that A.M. Best is wary of price competition intensifying to a level where price discipline is compromised for the sake of growth.

In 2007, A.M. Best expects commercial lines premium to decline a modest one percent. While on the surface this level of deterioration is quite modest, it does not consider actual pricing changes such as terms and conditions, premium credits and exposure growth. Nevertheless, A.M. Best expects commercial lines to produce a net underwriting profit in 2007.

The outlook for the commercial lines market is intended to span over the next 12 to 36 months and is a prospective view that considers the effects of potential internal and external pressures, the sector’s ability to optimize capital and its ability to preserve capital while maintaining balance sheet integrity over that period. While A.M. Best said it expects the inevitable lowering of the tide will happen again, thus far the commercial lines sector seems to be maintaining a rational level of price discipline while keeping the integrity of the balance sheet intact.

A.M. Best believes a trend should not be measured by any single cycle—hard or soft—and believes rating upgrades will be few in number until companies can truly demonstrate their underwriting acumen through the soft as well as hard market cycles. Those companies that are able to navigate through these cycles will benefit from rating upgrades over time. On the other hand, those companies that have insufficient price monitoring tools, relaxed underwriting standards and are aggressive during soft markets are certain to face negative rating actions in the future.

A.M. Best said it will continue to take a “more rigorous approach in its due diligence when evaluating companies’ capitalization, cycle management and risk management controls.” Exposure to terrorism, its impact on capitalization and the uncertainty surrounding a long-term solution to this issue are key concerns. The rating form says that catastrophe models will continue to be “valuable tools for the quantification of risk but are not the only barometers.” As part of enterprise risk management and cycle management, companies will need to demonstrate their ability to monitor and measure risk and provide quality data and adequate underwriting and risk controls, the firm adds. Consequently, A.M. Best said it will be requiring more detailed information through its supplementary rating questionnaire and in company meetings.

Source: A.M. Best

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